Bears Stalk Middle East Stock Markets

By David Rosenberg

Doha, Qatar

The year 2011 wasn't only tough for Middle Eastern despots. With the exception of Qatar, the Arab World's stock markets all ended the year with sharp drops both in share prices and trading volume as unrest took the wind out of much of the regional economy and sent political shivers everywhere.

All told, investors waved goodbye to more than $111 billion in stock market value over 2011, a drop of about 11 percent, according to figures from the Arab Monetary Fund. They took their biggest hit in Egypt, where the combined value of the country's stocks shed $33 billion last year, a 39 percent decline and the biggest anywhere in the Middle East and North Africa (MENA).

But it wasn't just the numbers that were bad. Egypt's stock market was shuttered for 55 days amid the turbulence of President Hosni Mubarak's ouster. Bahrain's financial center was cordoned off by police during unrest early in the year and the stock exchange briefly closed until martial law was imposed with the help of Saudi troops. The bourses of the United Arab Emirates and Qatar were denied coveted emerging market status twice in the space of six months.

"The Arab Spring that started last winter, of course, had an impact. That said, there also has been the impact of global bear market. So, in that respect, it wasn't all about the Arab Spring," Daniel Brody, chief investment officer of London-based Silk Invest, told The Media Line.

He said the situation is not likely to change without an influx of foreign investment, which is an unlikely prospect for now even if some MENA markets are displaying good fundamentals. "Investors have other concerns right now like Europe. They don't want to take on what they see as a risk asset," he said.

Indeed, 2011 was not a good year for stock market investors almost anywhere in the world, figures from MSCI, a company that benchmarks global share market performance, show. Its ACWI index, which tracks 9,000 stocks in 45 markets, shed 10.2 percent. But MSCI's Arabian Market index, which groups 14 MENA markets except Saudi Arabia, did worse, falling 22 percent last year and wiping out the two previous years of gains.

Even MENA economies that posted strong growth and avoided Arab Spring unrest failed to resist the bearish sentiment. Qatar's economy enjoyed a tide of cash from growing natural gas exports and $88 billion in government spending, yet the Qatar Exchange's benchmark QE index registered a mere 1.5 percent gain. Saudi Arabia's economy benefitted from higher oil prices and massive government spending, but its Tadawul All-Share Index fell 7 percent.

The United Arab Emirates (UAE) also saw a recovery from its real estate-induced slump during 2011, but MSCI's UAE index shed close to 20 percent.

"To be very honest, there was a disconnect between what was happening in UAE economy and markets," Fadi Al-Said, a senior fund manager at ING Investment Management in Dubai, told The Media Line. "We saw a major rebound in trade and tourism, but the market didn't reflect this. In some ways, that is because it is inefficient, but also because it is heavily exposed to the real estate and banking sectors."

Adding to the pain of falling share prices was a fourth straight year of declining trading volumes. The Arab Monetary Fund estimated that shares traded on the 14 MENA exchanges its covers dropped to $328.5 billion in 2011 from a peak of $1 trillion in 2007 -- decline analysts attribute mainly to an exodus of foreign investors after the global financial crisis set in in 2008.

That decline has hit the share-brokering business hard. In the UAE, investment banks like Rasmala and Shuaa Capital gave up their retail brokerage services last year to concentrate on institutional clients. On Monday, they were joined by Taib Securities, the brokerage arm of Bahrain's Taib Bank, after running up losses the past three years.

Many foreign investment banks also cut back last year. Germany's Deutsche Bank reportedly moved its head of local equity capital markets back from Dubai to London; Japan's Nomura shut its Dubai equity research unit; and Britain's HSBC closed its UAE retail equity brokerage business.

This year isn't shaping up to be much better. The turmoil of the Arab Spring shows no sign of abating and the outlook for the economies of the Middle East and North Africa looks poor. Although there are a few bright spots in the Gulf, the International Monetary Fund expects economic growth for the region to fall to 3.6 percent from 4 percent in 2011.

Al-Said, nevertheless, expressed the view that the Gulf has the foundations for a market recovery, especially now that a prolonged slump has pushed down valuations to attractive levels. With oil prices again on the upswing, the region's governments will be in an even stronger position than in 2011 to stimulate economic activity.

"This is one of the few regions which still has ammunition for [state] spending. I'm talking about surpluses that can be spent, about expansionary fiscal policy … You are talking about a region that isn't in an austerity mode," he said.

Even Egypt, whose economy is conventionally regarded as deeply troubled by continued political turmoil and plunging foreign reserves, has a potential for a rebound, said Broby. In spite of the turmoil, the economy continues to grow and Egyptian stocks are oversold, he said, warning, however, that investors will hold off on buying.

"People will be looking for Egypt to pass its new constitution before you start seeing the market reflecting the fundamentals," Broby said.

Meanwhile, markets are making efforts to lure back investors. On Monday, the Qatar Financial Markets Authority announced it had adopted new rules on listing securities and initial public offerings aimed at encouraging small and medium-sized companies to list. It began trading government bonds in the market at the end of 2011, which should help boost liquidity.

The UAE hopes to adjust rules that will enable it to win emerging market status next June, an upgrade that would make it more attractive to big institutional investors abroad.

But the most important development of all, say analysts, is a plan by Saudi Arabia to open up its stock market to foreigner investors. Reuters reported last week that authorities are close to unveiling the long-awaited plan and may announce the rules by Jan. 15 with implementation slated for by the end of the first quarter.

With the region's biggest trading volumes and market capitalization backed by a growing economy, Saudi Arabia could be the magnet to attracting new capital to the region.

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Bears Stalk Middle East Stock Markets | Global Viewpoint