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Fri 17 Jul 2009 04:00 AM

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Gulf stocks plagued by opacity, structural problems

Cheap Gulf blue chip stocks are set to stay off-radar for many foreign investors because of various issues.

Gulf stocks plagued by opacity, structural problems
Gulf stocks plagued by opacity, structural problems
Gulf benchmarks have seen sharp declines over the past few weeks.

Cheap Gulf blue chip stocks are set to stay off-radar for many foreign investors because of issues over transparency, a ban on short-selling and the region’s absence from key market indexes.

From January 2008 to the end of May 2009, net selling of Dubai-listed stocks by international funds totalled $2.07bn.

Gulf indexes fell between 28 and 72 percent in 2008 as the region’s oil-powered boom faltered. Crude prices slumped from a record high of $147 a barrel in July 2008 to under $35 by December. Oil is now at $65, yet rising revenues will not attract risk-averse overseas funds unless transparency improves.

“Transparency is not just about accounting standards, but the regular communication of information and access to management. These are very lacking,” said Robert McKinnon, managing director equity research, Al Mal Capital.

Investors are worried by the precedent set by the ongoing suspension of trading in Dubai-based mortgage brokers Amlak Finance and Tamweel, ahead of a proposed merger. The two stocks have been suspended since November 2008 as their fate is reviewed by a federal committee charged with merging the firms with two other state-controlled banks.

“One of the attractions of equities is that they are liquid and so whenever this liquidity is interrupted it scares investors,” said McKinnon.

On the face of it, Gulf Arab markets seem to offer investors a means of exploiting the region’s vast oil wealth, with the various benchmarks broadly correlated to crude prices.

But this is an indirect link as few energy firms are listed. So the correlation between equities and oil is largely based on the belief that rising crude prices will boost government revenues and therefore expenditure on infrastructure and development projects, enabling listed firms to gain.

Energy’s minimal presence leaves regional markets dominated by four sectors: property, banking, telecoms and petrochemicals. Analysts said it was difficult to rotate money from one sector to the other because of the lack of diversification, with no retail, healthcare or consumer plays to consider, and property and banking closely linked.

Haissam Arabi, CEO and fund manager at Gulfmena Alternative Investments, said speculative funds would trade Gulf stocks, but big players, including pension funds, would not, leaving the Gulf vulnerable to opportunistic, short-term traders.

Sanyalaksna Manibhandu, Emaar Saudi Financial Services head of research, said foreign ownership restrictions would have to be loosened, with some sectors often off-limits to overseas traders such as energy and telecoms.

“When the market goes down, there are no defensive plays,” he said.In June, index compiler MSCI opted not to upgrade the UAE and Qatar to emerging market status from their frontier market rating, citing a lack of segregation between custody and trading accounts and foreign ownership restrictions. This pair remains under review for a possible upgrade, but MSCI is no longer considering raising Kuwait’s status.

Gulf states’ continued absence from the MSCI Emerging Markets Index will deter foreign investors because it is used to measure fund managers’ performance.

“If you’re sitting in London and your bonus depends on beating the MSCI, why would you invest in stocks that aren’t even included in this?” said Al Mal’s McKinnon.

Abu Dhabi is the cheapest Gulf index, with a median price-to-earnings ratio of 6 for its 10 largest stocks by market capitalisation. Dubai is next cheapest with a PE of 8, followed by Qatar’s 9.52 and Saudi Arabia’s 10.3.

These compare with a median PE of 11.8 for the 10 top stocks on both the Dow Jones Industrial Average and the London FTSE 100, while the Japanese Nikkei is slightly more expensive at 12.4.

Saudi Arabia accounts for nearly half of total Gulf market capitalisation, yet remains essentially off-limits for Western funds, with trading restricted to swaps and participatory notes that see local brokers buy stocks on behalf of foreign players.

“These aren’t enough for pension funds and mutual funds, which want to own shares in their own name,” said McKinnon. “Saudi Arabia is the 500-pound gorilla in the room. Without it, the Gulf is not really an investible market for foreign funds.”

Gulf benchmarks have seen sharp declines over the past few weeks wiping out much of a two-month rally that began in early March following a sudden pick-up in oil prices.

Saudi’s index is the top performer in 2009, climbing 12.6 percent, while Abu Dhabi has added 9.9 percent, Dubai 5.2 percent and Oman 4.3 percent. Kuwait, Qatar and Bahrain have all declined year-to-date, with the latter’s 12.9 percent drop making it the worst performer regionally.

The rally from first quarter multi-year lows tempted some speculative international investors to return, especially to Dubai, the former regional magnet for foreign funds.

Yet the value of this trading has remained low.

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