Recent market action emphasise the lack of correlation between the MENA equity markets and their global peers.
MENA stands alone
Market action last month once again emphasised the lack of correlation between the Middle East and North Africa (MENA) equity markets and their global peers. The past month witnessed one of the worst environments for global market investors on record, while MENA markets fared much better, despite selling pressure emerging on some markets late in the month. The exception was the Egyptian market, which suffered for the second month in a row from a combination of economic and social pressures, and continued to show a stronger correlation with general emerging market sentiment than its MENA peers.
Most regional markets started the month on a strong note, witnessing generally positive sentiment combined with high trading volumes ahead of the much anticipated mid-year earnings reports. Momentum weakened in the middle of the month, however, and most of the markets traded lower on weaker volumes. The exception was one of the biggest markets in the region, Kuwait, which managed to shrug off the wave of profit taking in other markets to end the month as the only GCC market in positive territory.
General sentiment towards the end of last month was cautious as investors booked profits in Qatar, Saudi Arabia and Oman awaiting fresh catalysts and, in the case of Saudi Arabia, lucrative initial public offerings (IPOs). The Saudi market was unable to build on its strong start to the month as a wave of profit taking in the past week led to a monthly loss of almost 1.9 per cent, reaffirming this important market's position as the worst performing regional market this year. The heavyweight, Sabic, played a key role in driving the Saudi index higher earlier in the month and saw high trading volumes on news that the global petrochemical leader had signed a joint venture agreement with the Saudi Arabian Mining Company, Ma'aden, which started its much anticipated IPO of 462.5 million shares yesterday. The IPO hopes to raise 9.25 billion Saudi riyals (US$2.47bn) in the Middle East's biggest mining flotation, valuing the firm at $4.9bn.
Investors also built new positions in the recently listed Alinma Bank, which closed the month up 80 per cent from its opening price on June 2 and is becoming the favourite stock of speculators, given its high liquidity and large retail investor base. The strong IPO pipeline in the Saudi market continues to steal attention and liquidity from more established secondary market shares. The IPO by the Saudi Halwani Brothers was successfully completed on June 30, with nearly 2.38 million subscribers injecting about 749.9 million riyals, covering 437 per cent of the IPO value.
This and other planned IPOs led to a wave of profit taking in the secondary market towards the end of the month, as investors accumulated cash ahead of the earnings season and new issues in the market. Valuations in the Saudi market, even assuming only 10 per cent growth in corporate earnings, are at about 16.5 times estimated 2008 earnings, which is attractive vis-à-vis historical levels and other regional and global markets. The robust IPO market will continue to exert short-term pressure on the secondary market, before the long-term positive effects of increasing market depth are appreciated by the investor community.
Despite a relatively strong start to the month, the Dubai Financial Market (DFM) lost its momentum gradually throughout last month. High trading volumes and investors' interest were initially focused on the heavyweight, Emaar, in addition to Amlak and Tamweel, which helped pull the index to higher levels. However, the DFM General Index was hit by heavy selling pressure from local and foreign investors of banking and property sector shares, such as Dubai Islamic Bank and Emaar, as well as DFM stock, which masked stable performances from other important stocks in these sectors, such as Arabtec and Emirates-NBD, and led to the Dubai market index losing more than four per cent of its value during the month. In addition, the attention of local investors was diverted to the Ajman Bank IPO, which accounted for a large part of trading volumes towards the end of the month.
Continuing its recent trend, the Abu Dhabi stock market outperformed its Dubai peer, with a relatively small loss of 1.67 per cent last month. The ADX Index was weighed down by losses in Etisalat, as well as profit taking in the property sector leaders, Al Dar and Sorouh, amid news that they had reached their foreign ownership limits. The important banking sector was mixed, as First Gulf Bank and Union National Bank performed very well, while the heavyweight National Bank of Abu Dhabi was slightly lower.
UAE stocks are valued at more than 13 times forecast earnings, making them some of the most attractive markets in the region and beyond. The public equity markets have not fulfilled their potential, however, as local investors are preferring to invest in property and flows from foreign investors are subject both to ownership limits and general global sentiment. I anticipate a strong second half to the year in these markets, which should close the valuation discount with regional and global peers.
The Kuwaiti market once again showed its defensive characteristics and low correlation with other regional markets during the month. Attractive valuations, strong company fundamentals and positive second quarter corporate results expectations were the main factors in pushing the KSE Price Index to record levels. A healthy performance by most of the blue chips boosted the Kuwaiti bourse to reach a new historic high, and to cross the psychologically important barrier of 15,500 points.
The Doha Securities Market bucked its uptrend of the previous two months and closed slightly lower - down 0.18 per cent - as investors took profits after the recent rally. The Qatari market witnessed higher than usual volumes and broke the 12,500 level, mainly aided by a healthy performance by Islamic banks, backed by news that Qatar Islamic Bank had signed an agreement to underwrite the Twin Tower project, at 450m Qatari rials (Dh453m), through a lease finance arrangement.
The Omani market could not resist the temptation for profit taking after a very long winning streak and lost two per cent over the month. Heavy trading activity was seen at the beginning of the month on the back of Ominvest, which soared after announcing profits of about 5.84m Omani rials (Dh55.71m) after the sale of 17.3 million shares in Muscat Finance. The Omani index reached a fresh record high during the month, crossing the 12,000 mark, supported by buying interest on Bank Muscat, Oman Telecom and Bank Dhofar.
Khaled al Masri is a partner in the asset management division at Rasmala.