The return of the go-go market

The go-go days of the 2004 and 2005 stock markets are a distant memory for many investors in the region. It seemed back then that all stocks only had one trajectory, and risk was only a children's board game. The crash that followed caught many by surprise and severely dampened investors' appetites, despite extremely high levels of liquidity in the region. Today, it seems as if the drought is over, and everyone interested in owning a piece of the young listed companies on the bourses should be taking a good look at the new developments.

The headlines over the past few weeks have been mostly positive, with the notable exception of the turmoil in Kuwait's markets which have been suffering due to the political paralysis gripping the country's institutions. Stocks in the UAE and Qatar have rebounded by more than 20% since the middle of September, and have continued to build on those gains. Fahmi Alghussein, Executive Director and Head of MENA distribution for Equity Products at Morgan Stanley, attributes a major portion of the gains to an influx of foreign capital into the UAE's and Qatar's markets, specifically from US and European institutional investors. "They are looking to invest more and more," he tells Arabian Business.

Of course, foreign investors have always had a hand in the growth of the GCC, from the initial discovery of oil and its extraction, to the control of consumer goods and the introduction of Western brands to the region. But Alghussein notes that fund managers in the US who traditionally look at emerging markets in BRIC (Brazil, Russia, India, and China) and Turkey, where they "have achieved phenomenal returns over the last few years" have started to consider more seriously the region's equity markets.

"They have started visiting the region and getting to know the story and to meet with regulators, the stock exchanges, the companies, and the asset managers to get a feeling of what is going on and develop an understanding of the Middle East," Alghussein explains. From his vantage point at Morgan Stanley, one of the world's premier investment banks with a significant presence in the region, Alghussein says that much of the recent investment that has buoyed the market comes from "a mixture of long-only hedge funds and some proprietary trading".

This view is shared by many of the market professionals in the region. Fahd Iqbal, Senior Analyst at EFG-Hermes - one of the region's top home-grown investment banks, released a strategy note highlighting this development. However, he does not share the view that the new foreign capital is from long-term investors, but more "hot" money from hedge funds, and wrote that "evidence suggests that a significant portion of Western investors have been of the ‘fast money' variety."

The fact that this influx could evaporate as quickly as it materialised sours Iqbal's outlook for a sustained resurgence of the region's stock markets. Another factor that he notes is that after Western investors rallied the markets "retail investors began taking over". He stresses that "Western institutions did not exit the market - we just saw their buying activity die down and saw another shift coming from retail investors". Due to the somewhat fickle nature of retail investors, and the threat of capital flight from foreign investors "if the liquidity was to exit there would be a sharp contraction [that] will not be so strong that it would wipe out the gains that have been generated over the past two months, but it would be enough to consider." Given the implicit volatility, he has "concerns over the ability of the local retail investors to maintain the current momentum in the markets" and advises caution for those chasing the current rally.

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