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Are the rats deserting a sinking ship? Oger Telecom on Tuesday abandoned its proposed $1.25bn initial public offering in London and Dubai, citing “challenging and volatile” conditions in the Gulf markets.
“Challenging” is rather an understatement. The MSCI’S United Arab Emirates index has fallen 15 per cent over the past month. Saudi Arabia has sunk 64 per cent since its peak in February. Sentiment has not been helped by the fact that institutions account for less than a tenth of investment in the Gulf markets. Many small retail investors piled into the markets during their euphoric phase and have now retired, badly burnt. As prices have collapsed, so have trading volumes. In smaller markets like Bahrain and Oman, these are now below $10m a day.
In some respects, the picture is reminiscent of other emerging market meltdowns, such as Latin America’s Tequila crisis or the Asian crisis in the 1990s. As in those regions, Gulf equity markets are dominated by a few sectors like banking and telecommunications. There could be further fall-out. Banks in the region are believed to have lent heavily to individuals to finance stock market investment. In Dubai, where the index is dominated by real estate-related stocks, concerns are growing over massive oversupply of new property.
But there are crucial differences from earlier emerging market crises. Regional economic fundamentals are strong. There is no question of forced currency devaluation – indeed, Moody’s, the rating agency, actually upgraded the sovereign bond ratings of the six Gulf states in October. Liquidity, also, has far from dried up. The oil price may have fallen, but HSBC estimates that the Gulf states’ current account surpluses this year could still be over $200bn, or nearly 30 per cent of GDP.
Meanwhile, valuations are beginning to look genuinely attractive. With the Gulf markets (excluding Saudi Arabia) trading at about 13 times trailing earnings, below the emerging market average, even notoriously wary foreign investors could get interested.
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