JEDDAH: Mounting fears that the global financial turmoil will now spark a recession have rattled investors. The subprime crisis and credit crunch debacle have shaken global confidence in investment banking. Gulf stock markets too are facing a very turbulent period. Despite this a Saudi financial expert believes a cautious approach in investment could be beneficial.
The Saudi bourse that had rebounded over 17.5 percent in the last three trading days, ended the week up 11.4 percent but was still down over 41 percent on the year. Despite this sudden short-term rebound, Faisal H. Alsayrafi, managing director and CEO of the Jeddah-based Financial Transaction House (FTH), has advised caution.
The rebound was short-lived as the Saudi stock market tumbled 5.23 percent yesterday.
In an interview with Arab News, Alsayrafi said: “Following the economic crisis in the US, stock market reactions have been negative on a global scale. Across Europe and Asia markets have plummeted. In the Gulf, stock markets were also down to technically very oversold levels. But traders reacted with relief to efforts by the US and Europe to inject capital into banks and get lending flowing again.”
He added: “The MSCI GCC Markets Index has lost almost 40 percent of its value this year due to a number of reasons; certain markets, such as the Dubai real estate market has become very dependant on foreign money that is becoming less readily available.
Also, oil prices, which had touched record highs, have come down sharply, and therefore the short-term sentiment concerning oil remains uncertain. Overall, global markets remain volatile. Despite this sudden rebound on the short-term, I believe caution is the name of the game.”
Talking about the Tadawul’s new transparency rule, which was implemented recently, Alsayrafi, said: “It is definitely a move in the right direction as this rule is standard for markets worldwide.
“However, the timing of implementation may have been a little sensitive considering the psychological situation of the market. So I feel the first step would be to improve the current market psychology and develop investor confidence.”
He added: “This is the right time to open up the Saudi stock market. If foreigners and expatriates are allowed to enter the market, it would inject substantial liquidity into the market and could help revitalize market activity.”
When asked what advice he had for Saudi investors, Alsayrafi said: “We would advice caution with regards to the current real estate boom. However, opportunities seem to be strong in the telecom and petrochemical sectors. The construction and building industry looks an interesting prospect to keep an eye on.”
With oil prices dropping from a record high of $147 per barrel to below $70 per barrel last week, Alsayrafi said: “If oil prices keep falling, it would be a major blow for the region, which derives almost all of its budget revenues from oil and gas. As a result, we would see challenges for banks in the region as we may experience a liquidity squeeze.”
Alsayrafi holds an MBA from the University of Vermont and an MS in Accounting from the University of New Haven. He holds Certified Financial Consultant and a certified Valuation Analyst (from NACVA) accreditations from the US. He also holds CVA, CMEA, CM&AA, ASA, and CFC certifications from the US in addition to Certified Private Equity Specialist (CPES) from the US.
While replying to a question whether Saudi Arabia should diversify its economy away from oil like other countries in the Gulf are doing, Alsayrafi said: “Diversification of any economy is always positive. However at the moment over 90 percent of revenues for the Kingdom and other GCC countries come from oil. Yet with the development of new economic cities in different regions in the Kingdom, we do seem to be moving in that direction in the long-term.”
As Saudi Arabia is affected by high inflation rate of nearly 11 percent like some other Gulf countries such as Kuwait, UAE and Qatar, Alsayrafi said: “With the dollar value beginning to show improvement, inflation will steady itself and not continue to rise at such a fast rate. Further, witnessing the consumer markets in the US and Europe following the recent crisis, we estimate that countries will be prone to export at attractive prices, which should control the level of inflation we are experiencing right now.”
On Saudi Arabia’s real estate boom, Alsayrafi said: “The boom is definitely not sustainable at such levels. However, a correction should prove moderate. Should the global financial crisis prolong itself, and investors choose to leave the most open property markets, notably Dubai, then we may see real estate investments deflate, which would put a hold on construction activity and delay many projects. However, the Kingdom is not necessarily prone to this, as our property market is not as open as in Dubai. Nonetheless, governments stand ready to intervene if need be.”
FTH was established in 1994 by Alsayrafi. FTH was the third company to get a license from the Capital Market Authority (CMA), the stock market regulator, to operate as a transaction manager and to offer advisory services for capital market engagements in the Kingdom.
FTH has become the exclusive Global Mergers & Acquisitions (Global M&A) partner for the Gulf region and Yemen. Global M&A is widely recognized as one of the world’s leading partnerships of independent merger and acquisition houses. Its prime purpose is to provide cross-border support and opportunities for clients who wish to complete acquisitions, company sales, buy-outs and buy-ins, fund raising and other corporate finance transactions.
While describing FTH’s role after joining Global M&A, Alsayrafi said: “Our role is to locate potential investors as well as secure opportunities in the GCC (Gulf Cooperation Council). Furthermore, when our partner clients are seeking to invest in the Middle East, or are looking for Middle Eastern investors, it is our endeavor to locate and contact potential investors and clients.”
Following the 5th annual Global M&A conference between Global M&A and FTH, which was convened in Miami, Fla., recently, FTH will be hosting a similar meeting in Dubai on Nov. 3 to 5. “The conference in November will see smaller internal meetings, where we will be hosting about 100 leading middle-market investment bankers and dealmakers from our partner offices all over the world. This gives us an opportunity to reconvene, and since the conference is in Dubai, it’ll give them an opportunity to learn more and become familiar with the region, as we will also be inviting experts to present their opinion on the region’s markets,” Alsayrafi said.
He added: “Due to the slowdown of the global economy, we have seen a sharp decrease in the global M&A trend, however despite this, upper end deals seem to be faring the worst, while the middle-market, which is what we are involved in, remains strong and requires expert knowledge of niche markets, which is catered for through Global M&A, through our 12 specialized sector teams, including business services, chemicals, leisure and retail, and packaging.”
Alsayrafi said: “With the influx of cash into the region, we have seen an increase in interest in both local and international acquisition activity. On the other hand, as the Gulf becomes a central hub, we see an increase of oversees interest in the Gulf markets, as Asian markets in particular and all markets in general, are looking to make their mark in the Middle East by acquiring small and mid-size companies.”
Despite the current global financial meltdown, the investment return data that has emerged confirm that cross-border middle market returns provide a compelling reason to invest in those markets, Alsayrafi said.
Regarding M&A transactions, Alsayrafi said FTH handles the entire procedure, from locating and contacting investors, as well as performing due diligence, carrying out fair valuations of the companies, and completing the deal. FTH is a strong candidate for initial public offerings (IPOs), with many successful deals completed in this area and is currently involved in a few IPO deals and valuations.
Recently, the Saudi stock market has seen a wave of losses, which has left a negative perception in the minds of investors, at a time when market awareness and knowledge still remain limited. Thus, there has been added interest in the option of investing in Saudi mutual funds.
“Part of our scope of work at FTH is to release a daily and weekly technical research report for the Saudi market. We generate a study and analysis of daily stock market data, and provide a stock buy-recommendation as appropriate to market conditions,” he said.
Alsayrafi said it has been shown that the mutual funds market in the Kingdom is superior to trading on the regular stock market, and remains the better investment choice, due to it being run professionally and by specialized and experienced individuals. However, with the individual performance of the stocks being variable, and with over 200 different funds currently in the Saudi market, this leaves the final decision with the investor. “With regards to the trends of these mutual funds, we usually find they are positively correlated to the performance of the stock, since the majority of funds are usually invested in the market, and are therefore affected by these fluctuations. Although the investor does have the option to withdraw, it is important to remember that mutual fund investments are typically long-term (at least five years).
“The CMA has adopted new rules for IPO listings, which allow mutual funds to participate in IPOs and receive a large portion that regular individual investors do not have access to. This is an added benefit available to smaller investors through mutual funds,” Alsayrafi added.