World view: Arab markets outpace their peers

Led by Egypt's top showing - up 123 per cent as measured by the S&P/IFC Index through late June - Arab world stock markets in the Middle East and north Africa continue to register sharp, double-digit gains, outstripping other emerging market regions.

Buoyant oil and commodity prices, deregulation, privatisation and opening to trade and foreign investors provide the backdrop for abundant liquidity, which is absorbing a wave of initial public offerings and swelling capitalisation and valuations.

Worried that a bubble could be forming of the type that produced spectacular crashes in the 1990s, central banks have begun to scrutinise margin lending practices that have fuelled speculation.

However, the underlying development story, belatedly embracing a liberalisation and modernisation path common elsewhere in the emerging market universe, remains intact and should further attract diversification flows from dedicated funds as reported by industry trackers in recent months.

In Egypt, international investors, so far focused on the forthcoming November elections where President Hosni Mubarak has pledged to allow competitive opposition, now account for a third of daily turnover. The Orascom Group's holdings in construction and telecommunications with doubled annual profits are favourites, as are banks such as state-owned divestiture candidates Commerce International and Misr.

The government projects 5 per cent economic growth this year and a fiscal deficit of 3.8 per cent of gross domestic product on lower customs and tax charges.

Morocco, in contrast, has been the weakest performer with a 7.2 per cent slide through mid-year on anaemic GDP expansion, under 3 per cent and a

75 per cent earnings plunge at the blue-chip SNI conglomerate, the largest weighting, with mining and other assets. Following the signing of a free trade agreement with the US, Morocco has launched an overseas investment drive that saw France's Renault increase its stake in a local carmaker. An inaugural local currency bond issued by the World Bank's IFC arm diverted money from equities and was 30 per cent oversubscribed by domestic institutional investors.

Oman in turn reached new records, with an advance of 60 per cent through the half-year period. It is cheaper than its Gulf neighbours, such as Saudi Arabia, where price-earnings ratios are at 30, and has benefited from privatisation IPOs, including a 30 per cent portion of Omantel sold to local retail buyers and pension funds. Half a dozen additional brokers from throughout the region have sought licences to operate in Muscat. The Capital Markets Authority has strengthened enforcement and surveillance, and suspended activity in a local brokerage on suspicion of insider trading.

After a 7.5 per cent GDP leap in 2004, monetary authorities in Jordan have tightened policy to prevent overheating, lifting overnight rates to 3 per cent in May. Net portfolio inflows to the Amman exchange - which has advanced 82 per cent this year - were only $15m in the first quarter but private sector credit jumped 20 per cent on an annual basis on domestic demand from construction and manufacturing borrowers. Inflation was subdued at

2 per cent, although the current account deficit, excluding official aid, is significant at 12 per cent of GDP in spite of a 15 per cent rise in commodity exports so far this year.

Saudi Arabia, with $300bn capitalisation in 75 companies, is up 70 per cent. It is the regional giant although investors outside the six-country Gulf Co-operation Council can access it only through Saudi bank-sponsored mutual funds. At current oil prices and production levels, the current account surplus is set to exceed $50bn while the fiscal surplus for a second consecutive year will hit

10 per cent of GDP. Number one-ranked National Commercial Bank is expected to float 30 per cent of its shares by year-end in a transaction put at $3bn, and will join the previous privatisation deal of Saudi Telecom as the bellwether listing. A Capital Markets Authority was initiated to regulate trading, now cleared and settled electronically following international standards.

Among designated frontier stock markets, Lebanon has advanced more than 15 per cent and managed a big turnround - led by construction company Solidere, controlled by the Hariri family - with the exit of Syrian troops and a new government headed by the business executive son of assassinated prime minister Rafik Hariri. His administration is committed to a "Beirut pact" emphasising public debt sustainability and private sector competitiveness. The debt-GDP ratio stands at

185 per cent of GDP with annual budget and current account shortfalls in double digits.

Analysts predict future state enterprise unloading through the exchange and additional international support from the US alongside traditional European and Gulf allies to facilitate democratic and economic transformation.

Individual investors should note that a handful of specialist Middle East/north Africa boutiques operate from the region with New York and London representation but otherwise normal access is confined to a small portion of global emerging market funds.

Forthcoming alternatives may be index listings available on the Dubai International Financial Exchange, due to open in September and expected to include the Dow Jones Arab Titans companies and Islamic bond groupings packaged for western offshore buyers.

The author is senior partner at Kleiman International Consultants, which analyses emerging markets.