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Sun 13 Mar 2011 01:43 PM

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The lost year?

Only eleven weeks into 2011, and some analysts are already writing it off as a “lost year.” With regional stock markets plunging by fourteen percent since the start of political unrest, and leading stocks crashing close to 30 percent, is this the time to buy or fly?

The lost year?
The market capitalisation of sixteen Arab bourses was valued at $862bn on March 4, compared with $1.002bn on January 25, a day prior to the political crisis

On Friday January 14, as most investors in Gulf stocks settled into their weekend, many were looking forward to the year ahead. The region’s stock markets had made gradual recoveries in the final weeks of 2010, and with few fears of a double dip recession in the region, the outlook was positive. In the UAE, some experts even dared to suggest that property prices, that had crashed 60 percent over the past two years, could start to rise again. The price of oil stood at around $90 a barrel.

By late evening the same day, the mood had visibly changed, as Tunisian president Zine El Abdine Ben Ali fled the country.

“People like me were a little nervous, a little cautious. I got burned badly in the Dubai property crash, and decided to move into equities for 2011. They were saying on the news that the protests could now spread, and I thought if they do, some of my investments may take a slight hit in the next couple of weeks. Now, I don’t know, I just don’t know what will happen anymore. Whichever way you look at the numbers, they are not good,” says Tareq Hadin, a Dubai-based investor.

Hadin is certainly right about the numbers. The fall of Ben Ali has been replicated by drastic falls across Arab stock markets. Since January 14, the Dubai Financial Market has plunged fourteen percent. Stocks in Saudi Arabia and Kuwait are down twelve percent, and the latest report from the Arab Monetary Fund makes for bleak reading: The market capitalisation of sixteen Arab bourses was valued at $862bn on March 4, compared with $1.002bn on January 25, a day prior to the political crisis in Egypt that triggered unrest across the Middle East. That equates to a $140bn loss in value for Arab stock markets over the last five weeks, totally wiping out the nine percent gain seen in 2010.

Nouriel Roubini, one of the few economists who predicted the global financial crisis, isn’t forecasting better news this time around.

“We’re moving in a period of time where there’ll be more uncertainty. There’s more pressure for political rights and income. You might see workers striking for more income and that could lead to a rise in inflation, budget deficits,” says the CEO of Roubini Global Economics, adding: “We shouldn’t kid ourselves that it will be easy... In this [political] environment it's very hard to make long term investments unless you know the region well.”

According to Roubini, increased political unrest could lead to fiscal “turmoil,” and he compares the possible recovery period of the current situation to the “decade” it took Eastern Europe to recover after the fall of the Berlin Wall in 1989.

 Worse still, if oil prices reached the highs of the summer of 2008 — which saw $140 per barrel — some advanced economies would start to double dip. “If oil goes up another fifteen to 20 percent [from the current prices], there’s a risk to the US, the Euro Zone, Japan,” he explains.

There have been some big scalps since the start of 2011: Emaar shares are down 28 percent; Arabtec down 38 percent; Al Rajhi Bank down thirteen percent; Batelco down fifteen percent; SABIC down six percent. Pick a market, choose a stock, and the graph is likely to be pointing downwards.

“Every stock, every asset class, every economy and every investment avenue in this region has been affected,” says Asher Noor, Chief financial officer of AlTouq Group in Saudi Arabia, adding: “Any country that sees productive working hours, days or weeks being sacrificed to unrest and uncertainty will experience economic loss.”

But Noor, despite being concerned at the falls across the region, remains positive in the long term, and rejects the suggestion that foreign investors are quickly moving out of the area as fast as possible. “There are so many rich pickings to be had that I think, only the most unsophisticated or irrational of the international investor class will take a one way ticket out of this region. I foresee more investment opportunities coming along and even better/greater valuations so the exodus is at best, a figment of someone’s imagination… For a recovery to happen there needs to be a loss — sustained loss. What we are seeing now on the stock exchanges in the region is irrational, knee jerk reactions. This is not going to be a sustained situation so a recovery will be on the cards in no time at all because the fundamentals of companies operating in this region are by and large in good health.”

Noor’s upbeat views for the future are shared by some, who are confident the storm will be weathered — and now is the time to buy stocks. “2011 does not need to be a ‘lost’ year. For those foreign investors that stay out when prices are low, it will be a year of lost opportunity. Qatar continues to grow at double digit rates. The UAE is forecast to show robust statistics, and has any number of great companies that would suit a dual listing on other exchanges,” says Peter Gotke, VP at The Bank of New York Mellon Depositary Receipts.

Nevertheless, the huge drops already seen in major stocks such as Emaar mean that as far as some analysts are concerned, whatever happens in the coming few weeks will make little difference: 2011, for some, is already being labelled a “lost year.”

Nicholas Wright, Head of Institutional Brokerage, Mubasher Financial Services, tells Arabian Business: “We started in January cautiously bullish about this region. It has had a shocking few years and volumes have been depressing in the UAE. I think the region was on the cusp and we were cautiously optimistic but this event has happened and we don’t know where it will end up and while there is uncertainty it is not good for regional equity markets.”

Many experts are now watching cautiously to see which exchanges in the GCC suffer the most — and stress that not all are necessarily in the same boat. Bahrain — scene of some of the worst troubles in the GCC — has seen its stock exchange fall by just three percent since January 14.

As Wright explains: “Bahrain and Oman are minor markets. Bahrain trades about a million dollars, if that, a day. Again, Oman trades a few million dollars, so it is a secondary target size market. These combined don’t have more than $10m a day… With all due respect, the markets that we worry about are Saudi Arabia and Egypt, these are the two heavyweights.”

Much of the financial focus is now likely to be on oil prices, although experts such as Roubini remain cautious over what impact rising prices will have on the global economy. Energy prices have spiked in the wake of widespread Arab unrest but the risk of a double-dip recession remains low, Nouriel Roubini told last week’s Middle East Investment Summit in Dubai. He said: “At the current level, the effects on economic growth are going to be relatively modest…There’s going to be a reduction in economic growth, but that effect will be relatively modest.”

However, he tells Arabian Business that should the political situation escalate — particularly in Libya, one of the world’s top oil producers — it could take a toll on developed economies. If [the price of oil] rises much more sharply, he says, economies in the West that don’t have access to giant oil reserves could see an economic setback.

“There is a scenario that could get worse and oil prices could get higher. And oil is important for the global economy.”

In summer of 2008, oil reached $140 per barrel, a factor Roubini dubbed as “one of the tipping points” for the recession that began in the fall of 2008. In MENA, he said the region’s potential for long-term growth would offset any short-term slump caused by unrest.

“While there is concern about the Middle East, there are also prospects for significant economic growth in the [MENA] region,” he said. Turkey and India — whose economies are becoming further integrated with those in the Gulf — “might actually do better than [countries like] China, which are changing from economies based on net exports to those of consumption”.

He refers to the global economy’s current situation as “glass half full, glass half empty.”

“There’s opportunity but plenty of significant risk,” he explains.

Which way investors see the glass could well determine the financial future of the region.

*Additional reporting by Karen Leigh