Can so many global financial institutions be wrong? Over the past few months international stalwarts such as Citibank, Credit Suisse, Deutsche Bank and Morgan Stanley have all weighed in on their outlook for the Gulf’s regional markets, and the verdict is an unequivocal thumbs up.
Adding to this shamal of interest, MSCI, one of the most influential index providers, launched a “frontier” markets index last week, featuring the UAE and Bahrain, to sate the hunger of international investors seeking new prospects.
“We like immature bull markets,” notes Citibank in its regional equity report. “Returns tend to be higher, for each unit of risk, than in more mature market environments... even though markets have begun to recover this year, sentiment has not yet fully rebounded... this indicates to us that there remains scope for markets to rise further.”
Merrill Lynch also likes what it sees in the Gulf, noting that Gulf markets remain its “top frontier” recommendations, based on simple factors such as cheap valuations, abundant liquidity and strong economic growth.
To be fair, one cannot help but be optimistic. The global economy continues to chug along with predictions of around 4 percent growth next year — a US-recession threat notwithstanding — and oil prices are set to remain high. “There are many hungry, emerging markets, which will keep oil prices and Gulf economies buoyant,” says Farhan Mahmood, chief investment officer of Riyadh-based Falcom Financial Services. “But I don’t see linear growth in regional equity markets — I see very choppy conditions and volatility.”
With such a surge of interest coming through, there is a real danger that markets will overheat again quickly, similar to the equities pot boiling over in 2006.
“Absolutely. As long as there is no investor education, and people have more money under their mattresses than banks, we will continue to see markets overextending themselves,” says Cecil Owens, Chairman and CEO of Total Technologies and Solutions, which works closely with the region’s financial services industry.
Owens’ may be the lone voice of dissent drowning in this euphoric din.
Brad Bourland, Head of Research at Saudi-based Jadwa Investment is firmly on the bullish side of the fence. “I don’t think there is any danger of a bubble in the markets in 2008. Markets might be bubble-prone in two years’ time, but not in 2008,” Bourland told Zawya.com from Riyadh.
But has the investor psyche changed since the crash of 2006 to suggest that investors are more cautious this time around?
“The crash of 2006 has been indelibly imprinted on the national psyche, and people are cautious,” says Bourland. “You may have noticed that Kuwait escaped the regional crash of 2006 as it had already been through a crash before, and investors were much more mindful. Also, there is now greater depth in markets and greater participation from foreign banks.”
IPO pipelines are a good indicator of the market’s mood and judging by the companies queuing up to float, the atmosphere appears to be positively ecstatic. Gulf markets have seen 33 IPOs to date this year valued at $11.15 billion, suggesting that investors have shrugged off the wretchedness of 2006, a year which saw 21 IPOs raising $7.2 billion.
And the good times appear to have just begun.
According to Zawya’s IPO Monitor, close to 84 new IPOs are expected to come into the market from now till the end of 2008, dominated by Saudi and UAE listings, although there is also a smattering of rumored IPOs popping up from Kuwait, Qatar and Bahrain. Saudi Arabia’s Al Inmaa Bank, the $2.82 billion big-ticket IPO is expected to come out soon, while MTC-led Saudi Mobile Telecommunications Company’s $1.5 billion is another. Other potential IPOs tentatively set for next year include Kuwait’s Noor Telecom Holding and Kuwait Airways.
Privatization will remain a key IPO driver, with the likes of Nakheel (and even Emirates airline) indicating their intention to float parts of the company at some point and a number of energy joint ventures in Saudi Arabia looking to offload shares.
All is well for now, though. The Saudi market, which had been in the red for the first half of the year has jumped nearly 20 percent by the end of November to around 9,640 points, no where near its 2-year high of 20,000-plus points. The Dubai Financial Market is also miles below its 2-year high of 8,000-points, sitting around 5,269-points by late November, up nearly 28 percent this year; Abu Dhabi is up 35 percent this year, some distance away from its 2-year high of 5,500 points.
The writere is the managing editor, Zawya.com
