Morgan Stanley upbeat on Mideast shares

Morgan Stanley urged investors on Sunday to increase their exposure to Gulf stocks because equities are now an "attractive" option again.After advising investors to pull out of the region in October 2008, the investment bank, in its latest report on GCC markets, said the region would be resilient to the global crisis, with Saudi Arabia the most attractive market together with Qatar and Egypt.

“The region will undoubtedly be one of the more cyclically impacted by the economic downturn, but we think the strong economic fundamentals (low external debt and strong domestic demand growth) and fiscal/monetary stabilisers in the region mean growth will remain resilient,” the bank’s latest MSCI Arabian Markets report said.

“Saudi Arabia is in one of the strongest positions to weather the global crisis due to the fact it possesses one of the largest pools of FX savings and accumulated fiscal surpluses in the world, a sound banking system and minimal real estate exposure. The prospect for further liberalization of equity markets in the country to foreign investors provides an additional incentive to increase positions,” the report continued.

The MSCI Arabian Markets index has underperformed the MSCI Emerging Markets index by 23 percent since October, presenting good value to equity investors.

However Morgan Stanley stopped short of advising a too aggressive position and cited banks’ exposure to real estate as key concern.

“Several headwinds in the short term prevent us from recommending a more aggressive position. Regional banks' exposure to falling property prices is a concern, as is the reliance in some banking systems on wholesale funding. Another potential worry is the exodus of foreign capital from the region in late 2008 which has been a key source of vulnerability,” the report said.

It listed Telecom Egypt, Qatar Telecom and Qatar Electric and Water among its preferred stocks.