Arab world exchanges reversed in the first quarter, with Jordan, Kuwait, Qatar and the United Arab Emirates suffering double-digit losses after a three-year stock market frenzy that had seen capitalisation double and indices quadruple throughout the region.
This was a crash foretold. Before the slide, Gulf money managers handling hundreds of billions of dollars had prepared diversification and exit strategies that widened the scope for foreign investors to enter.
Attention has now moved to Asia as a destination for the Gulf’s investment dollars – specifically Malaysia, Pakistan, Indonesia, China and India. Malaysia and Pakistan both offer no-interest Islamic debt at home and abroad. Karachi has a dedicated category for Gulf allocation to its bourse, and half of Malaysia’s corporate bonds are Shariah-compliant to target subscribers from there.
The Kuwait Investment Authority, with estimated assets above $100bn, says it will buy a stake in Big Four Chinese state bank ICBC before its scheduled public listing this year.
And in India, where western funds have cut exposure in reaction to stretched valuations for blue chips, Gulf money has arrived to reinforce record levels of money pouring into equities. Indonesia also attracted interest from the Gulf in the first quarter, supporting currency and stock exchange rallies.
This year’s correction has also been accompanied by a new phenomenon – Gulf companies are reaching out to western individual and institutional accounts. Examples include the recent partial dual listing of Saudi prince-owned Kingdom Holdings in Dubai and London, and the launch of a Bahrain-based private equity company specialising in small enterprise.
There have also been multibillion-dollar debt deals, led perhaps ironically by the one completed by Dubai Ports World prior to its controversial takeover efforts in the UK and US.
Regional mutual funds are also seeking international high net worth clients. Following the correction, they may find the region is now a viable place to invest.
Attracting foreign money was also a theme of the Dubai Wealth Forum in February, where participants said they doubted the torrid pace of economic and corporate earnings growth could be sustained.
Following the launch of the Dubai International Financial Exchange, they said they needed more initiatives to attract long-term funds from abroad, particularly for the oil industry and to modernise infrastructure. As the six core markets of the Arab world cooled and Asia strengthened as an alternative destination, they predicted there would also be less spillover into the broader Middle East and north Africa region.
Even after the correction, these markets carry some weight. The International Monetary Fund again is projecting 5 per cent gross domestic product growth for the region this year, on a combined current account surplus of $200bn. The total market capitalisation of the Gulf region is one-fifth of all emerging markets, at more than $1,000bn. Before the setback, p/e ratios were in a range from 30 to 50, double the norm elsewhere, on annual 50 per cent company profit rises. Initial public offerings were oversubscribed hundreds of times. Banking, telecoms, real estate and construction have been the hottest sectors, with few direct oil and gas plays available.
Saudi Arabia’s size at more than $600bn tops emerging markets. It soared 150 per cent in the year to January 2006, according to the MSCI index, but ended the first quarter flat. Outside the partially privatised petrochemical giant Sabic, which is the biggest weighting, foreign investors must go through local mutual funds and are waiting for permission to access bank stocks. These have enjoyed a commercial lending boom and look attractive.
World Trade Organisation rules providing for “equal treatment” are set to bring gradual opening, and officials have recently urged a faster pace. However, with the industry loan-to-deposit ratio near 90 per cent, future business is constrained and the government continues to pay down domestic debt, adding to pressure on balance sheets.
Kuwait, which experienced a dramatic crash in the mid-1980s that took 10 years to resolve, has the largest free float. The central bank tightened conditions for margin credit on IPOs, helping fuel the decline. A capital gains tax also helps deter overseas investors, who find a warmer welcome among neighbours who allow acquisition of controlling and majority share stakes.
One is Qatar, which has generated excitement with new hydrocarbon capacity. Another is Oman, whose framework is among the most liberal. Authorities have stiffened regulation and banned leveraged trading.
Bahrain, the traditional offshore centre for the region, permits 100 per cent foreign holding in certain listings, with phone company Batelco the dominant non-financial one.
There is a new offshore competitor for the UAE’s two domestic exchanges, which have a combined capitalisation close to $200bn. The six-month-old Dubai International Financial Exchange aims to offer a full range of tax-free debt and equity instruments, including a fund based on the 50-stock Dow Jones Arab Titans Index.
Beyond the immediate area, Egypt, which led the MSCI in 2005 with a 150 per cent gain, has been the favourite, and it was up 5 per cent by the end of March. Jordan and Lebanon, too, have received inflows, with Lebanon’s local index up 19 per cent.
The writer is senior partner at Kleiman International Consultants