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Sun 10 Aug 2008 04:37 PM

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Global downturn hitting local markets - ING

INTERVIEW: Dutch bank predicts exchanges will trade sideways until end of year.

Middle East stock exchanges will trade sideways until the end of the year despite recent bull runs by some local markets as the slowdown in the US and Europe filters through to the region, a senior ING executive said on Sunday.

Grant Bailey, the chief executive of ING Investment Management in the Middle East, said it will be well into 2009 before institutional investors from the West - put off by the current economic climate globally and regional geopolitical tensions - return to the market.

Bailey said solid second quarter results had not been reflected in share price movement, an indication that the global downturn was beginning to impact Middle East markets.

“The reporting season that came out recently was quite okay but the markets aren’t responding very well,” Bailey told Arabian Business in an interview.

Regional markets are seen by many as a defensive play due to their low correlation with western economies, but the failure of strong second quarter earnings to boost share prices could be a sign that this is about to change.

“The correlations are probably picking up a bit as the US is going down,” Bailey said.

International investors have been pulling out of the Middle East amid turmoil in the world’s stock markets and following geopolitical tension over Iran’s nuclear programme.

“It’s going to take a while [before institutional investors regain confidence in local stocks]. We’ve seen this through the dot com bust back in 2001," he said.

“Every eight years we tend to have these cycles going through markets. This one is pretty insidious because it really is going through to the fabric of the banking system.”

ING still encourages investors to invest in the markets, he added. “The corporates still have good fundamentals. They’re not massively over-geared.”

If global indexes upgrade the UAE, Kuwait and Qatar to emerging markets from frontier markets, major stocks in those countries could get a boost as early as next year, as index-tracking funds snap up local shares, Bailey said.

MSCI Barra, a provider of global equity indices, said in July that it may reclassify the three Gulf countries as emerging markets.

“If three countries come in, we believe about $400 million could have to be re-weighted into the region,” Bailey said.

Middle Eastern bourses have posted mixed results in 2008, with Lebanon (+27.5%) and Kuwait (+17.2%) outperforming while regional heavyweight Saudi Arabia (-28.3%) fell to a 41-week low on Saturday ahead of a new rule that would force companies to disclose the names of shareholders with a stake of over 5%.

Netherlands-based ING Group said in June that it plans to raise up to $5 billion in the Middle East and North Africa (MENA) over the next three years through investment funds. Later this year it plans to launch its first Middle East fund, which will have assets under management of $1 billion.

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