|~||~||~|With oil price rises showing no signs of abating and talk of a possible $90 a barrel spike later this year business is booming. In addition, other already dominant sectors are increasing both in value and status including banking, petrochemicals and gas and property, so it isn’t surprising the region’s stocks have reached record levels in recent times.
Local companies collectively raised around AED40 billion through rights issues last year, while Dubai’s market index jumped 145% in 2005 and Abu Dhabi by 69%.
A recent example is the Saudi Arabian Stock market index that broke the 18000 point barrier on 19th January this year, closing at 18004, setting a record since it first opened its doors over 20 years ago in 1985. The market recorded a historic trading value of SR37.4 billion (US$10 billion) lead mainly by stocks in banking and industry. Unsurprisingly the combined effect of improving international oil prices and the announcement of several large profit making shareholding company results at the end of 2005 raised the bar in the Kingdom. One of the major forces in the country, Saudi Basic Industries Corp (SABIC), for instance, returned a profit of around SR19.2 billion (US$5.12 billion), a massive 35% increase on 2004 figures.
But the major questions analysts across the region are asking themselves is can the Middle East sustain
these unprecedented levels; and if so, have various regional markets reached saturation point?
David Butter, senior Middle East economist and chief energy analyst at the Economist Intelligence Unit, says it is not a question of how long the boom last but when the bubble will
finally burst? He predicts that dramatic events could take place over the coming 12 months.
“The region has had some astonishing rates of growth but people need to take a long hard look at whether
this is sustainable.”
Shirish Saraf, executive director at asset management and private equity giant, Abraaj Capital, told CEO Middle East that he only expects more mature markets such as Oman and Kuwait to make any headway in 2006.
“The UAE, Saudi, Qatar, Lebanon and Jordan markets will all go down this year while those that have already been through boom and bust periods will do well. Experience counts for a
lot in this situation.”
Saraf even suggests that “90% of stocks” were overvalued. “The remaining 10% are already dominant players and will survive any market falls but most stocks have defied gravity over the past two years. “Of course the Saudi Arabian economic boom is still waiting to translate itself into results but take UAE banks and the real estate sector there and it has reached saturation point.”
Speaking at the World Islamic Banking conference in December last year, Abdulhakeem Alkhayyat, general manager of Kuwait Finance House (Bahrain) also forecasted that investors in the region could be about to see a sudden drop in the market as some prices had “over-reached themselves” and could be susceptible to a sudden, sharp downturn.
He warned that a large majority of small investors had, and were still, placing funds into stocks based on “rumour and hearsay” and without really looking at what the stocks they
were investing in.
Shehab Gargash, managing director of asset manager Daman Securities, said that returns from UAE stocks were likely to slow to between 20 to 45% in 2006 from more than 100% in 2005 with banking and Islamic institutions expected to be the fastest risers.
Signs that the market is weakening, however, have so far been few and far between, but as the flow of annual figures for 2005 begins to seep through in the first quarter of this year, some indication of whether 2006 will be the year for a dip in fortunes could appear sooner rather than later. A trace of a lack of confidence in the market came only as CEO Middle East was going to press as the UAE and Qatar stock
markets continued their recent weak performance in late January with a fall of 3.5% on the Dubai Financial Market, 1.3% on the Abu Dhabi Securities Market, while the Doha Securities Market fell by 2.9%. The Kuwait bourse,
however, was up by 2.5%.
Atlas Investment Group, a regional investment bank headquartered in Amman in Jordan (see box out), believes the market boom will simply continue to grow year on year for the foreseeable future. A spokesman said that many sceptics doubted the region’s ability to maintain its momentum after a robust 2004 and 2005 but that 2006 would mark an “even stronger year” for the Middle East and North Africa (MENA) region.
“As MENA’s markets continue to expand amid economic, social, and political reform, stocks will also continue to prosper. The Amman Stock Exchange (ASE) was among the best performers in the region as it ranked fifth following the capital markets in Palestine, Egypt, UAE and Kuwait,” he adds.
One emerging market that many analysts predict will see increased activity and attention is Islamic banking – a massive growth driver towards the end of 2005. Subscription to Dubai Islamic Bank’s (DIB) first ‘Al Islamic equity fund, for example, closed at more than double its expected size at US$100 million in January of this year and was substantially oversubscribed after receiving an overwhelming response from investors.
The fund, established with the mandate of investing in Shariah compliant securities across the six GCC Countries, offered 5 000 000 units at US$10 a unit and received minimum applications of 25 000 units for institutional investors and 250 units for individual investors – a perfect example of market diversification, something many investors have chosen to examine as an alternative to energy and oil stocks. According to Saeed Al Quatami, head of wealth management at DIB, 2006 will almost certainly see further investment in this area. “The demand for the fund has been across the board from retail clients, private banking, as well as institutions.”
DIB isn’t the only bank to prosper. According to the executive president of the Central Bank of Oman, the country’s banking sector reported a 25% growth in profitability for 2005. The bank declared a yearly profit of $52.9m, almost four times the previous year, while the combined profit of banks was up 31.4% to $276.6m, as at the end of November 2005.
Whether 2006 is the year when financial markets take a turn for the worse is hard to predict. Many analysts see dips in trading as a natural tapering after a flurry of overpriced stocks. The UAE, Kuwait, Egypt and Saudi Arabia are all on the rise, but keep your eyes peeled, a levelling out of some disproportionate stocks could take place sooner rather than later.||**||
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