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Wed 12 Jan 2011 08:20 PM

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After lost year, Middle East investors upbeat about 2011

Region has lagged emerging markets, but investors are optimistic heading into 2011, finds poll

After lost year, Middle East investors upbeat about 2011
Qatar had the best performing stock market in the Gulf last year with a near 25 percent gain, while Saudi Arabias index rose a modest 8 percent

Gulf markets have grappled with debt, regulatory worries and stalled IPOs in the past two years, lagging emerging market peers, but investors see better times ahead in 2011.

The bullish tone is more evident in a year seen globally to be better for riskier assets such as equities as the pace of the global economic recovery speeds up and ample liquidity drives investment.

A Reuters poll of 55 leading investment houses in the US, Europe ex UK, Japan and Britain showed equity holdings among investors at a 10-month high in December.

Historically, markets in the region have performed well when risk appetite among investors improves globally.

"Investors are very optimistic heading into 2011," said Fadi Al Said, portfolio manager for ING Investment's $95m Middle East North Africa (MENA) fund in Dubai.

The region has been largely bypassed by a two-year rally in emerging markets where indices in Brazil, India and China hit all-time highs and investors scrambled to build positions.

 After significantly outperforming in 2009, the MSCI Emerging Markets Index topped Gulf Arab markets again in 2010 with a 16.4 percent gain versus the S&P GCC index which rose about 13 percent.

"The region (as a whole) has definitely lagged emerging markets. However, some markets outperformed, like Qatar and Morocco," said Nadi Bargouti, head of asset management at Dubai-based investment bank Shuaa Capital.

Valuations and strong earnings will classify the region as an "attractive yield play", analysts at Kuwait Financial Centre (Markaz) said in a recent research note.

"We are entering 2011 with a lot of stability. Earnings growth is going to be good and should provide a fillip to markets," said MR Raghu, senior vice president for research at Markaz.

Key factors that could boost the region this year include the possible inclusion of Qatar and UAE indices in MSCI's Emerging Markets Index and the possibility that Saudi Arabia might allow direct access to foreign investors.

Currently none of the Gulf countries are part of the emerging markets benchmark and inclusion would force passive asset managers tracking such indices to allocate money to the region. "When the indices upgrade countries to emerging markets status, it is likely to have a very positive impact.

Qatar and UAE are at the top of the list," Slim Feriani, chief executive of London-based investment firm Advance Emerging Capital said in an interview. "I am not sure Qatar can even absorb the amount of money which will be pumped into their markets." Some issues which have plagued markets in the region may also begin to slowly fade away in 2011.

Analysts say it is possible that the property market will hit a bottom in 2011 after slumping more than 50 percent in places like Dubai and banks may resume lending, albeit at a cautious pace.

"We have been talking about the same issues for three years now. The pace of deterioration we have seen in the past will be more subdued and markets will start to look beyond all issues," said ING's Al Said.

Bank lending, which dried up in countries such as Saudi Arabia and UAE may slowly revive as provisions to meet loan losses against family businesses and government entities peak.

"We need the banks to draw a line in the sand and kick start lending again," said Shehzad Janab, head of asset management and advisory at Daman Investments in Dubai.

Analysts and fund managers tout the tiny Gulf Arab state of Qatar and top-oil producer Saudi Arabia to remain preferred markets for 2011 and see further increases.

Qatar, one of the world's fastest growing economies, had the best performing stock market in the Gulf last year with a near 25 percent gain, while Saudi Arabia's index rose a modest 8 percent.

Qatar's winning bid to host the 2022 football World Cup is expected to bring investments to Qatar and have a knock-on effect on the bourse. In Saudi Arabia, with oil prices at $90 a barrel, government spending is expected to rise and benefit the kingdom's key sectors.

The government plans to spend $155bn in 2011. "Budget expenditure will have a positive impact for the Saudi market," Shuaa's Bargouti said.

High oil prices are expected to lift petrochemical stocks, Saudi Arabia's key sector, while the bank sector, another top constituent of the index is expected to book lower provisions and resume lending, mainly to government-backed projects.

Another market which investors say may spring a surprise is the UAE, which was the region's worst performer in 2010 with Dubai's index falling 10 percent. "There is so much gloom and doom in UAE that the markets are starving for good news and any positive announcements will help drive a rally," Janab said.