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Sun 12 Oct 2008 11:32 AM

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Gulf markets 'offer good value' to investors

EFG Hermes report identifies buying opportunities in the region following sell-off.

Stock markets in the Middle East and North Africa (MENA) offer excellent buying opportunities following the recent sell-off, but it will take time before international investors return to the market, an EFG Hermes report says.

Short term selling pressure is expected to ease in the coming weeks since the majority of international players looking to free up liquidity will have exited the market.

But although foreign ownership is at levels last seen about two years ago, international investors currently have little reason to return to the market, a report by the bank said.

At the beginning of last year, international buyers were drawn to the MENA region by cheap valuations and low correlation to international stock markets.

Today cheap valuations have become a global commodity and developed markets, followed by established emerging markets, will be seen by most investors as more attractive than frontier market such as the Gulf.

“Our view that Western institutions would provide a base of stability has been shown to be flawed as such investors have been extremely quick to cash out,” the report said.

“To some extent though, this is also a reflection of the high proportion of ‘hot money’ that had penetrated some MENA markets and the low representation of traditional longer-term institutional investors such as pension and insurance funds.”

The authors of the report prefer the Qatari and Saudi markets, whilst favouring a “stock selective” approach to the UAE and Egypt.

Sector-wise, the EFG Hermes report prefers exposure to select telecoms; Abu Dhabi real estate; Dubai contractors; Qatar industrials and utilities; and Egyptian contractors and industrials with exposure to regional infrastructure investment.

Government backed projects in infrastructure, power, water and hydrocarbons remain the most secure given the economic need for them.

Projects that are scheduled to begin over the next 24 months are higher risk and tighter credit conditions are likely to lead to delays and cancellations of less profitable ones.

Still, EFG Hermes said the bulk of its MENA earnings forecasts remain firm, with hydrocarbon rich countries the most underpinned.

“While we see elevated risks for 2009-10, we believe they are more than priced in at current levels,” it said.

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