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Thursday, 29 January 2009

Gulf growth seen outpacing other emerging markets

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The region is under-represented in global portfolios, mainly because just three MENA countries belong to the MSCI Emerging Markets benchmark index.

MANNHEIM, Germany, Jan 28 (Thomson IM) - Economic and corporate earnings growth in the Gulf region looks set to outpace other emerging markets, making Gulf stocks attractive, two equities fund managers said on Wednesday.

'The Gulf's macro (economic) outlook is positive, especially compared to other emerging markets,' said Birgit Ebner, manager of Frankfurt Trust Asset Management's 45 million euro ($59.5 million) Emerging Arabia fund.

'We are convinced about the GCC (Gulf Cooperation Council) region's growth prospects and corporate profit prospects,' Ebner told a mutual funds conference in Germany.

'Investing in equities only makes sense if you believe in growth,' said Joe Kawakabani, manager of Franklin Templeton's $40 million MENA fund, which invests in stocks of Middle East and North African (MENA) companies.

The market value of MENA equities at about $780 billion is on a par with India and higher than South Korea, he said, noting that the region is under-represented in global portfolios, mainly because just three MENA countries -- Morocco, Egypt and Jordan -- belong to the MSCI Emerging Markets benchmark index.

The Gulf Cooperation Council countries -- Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Bahrain and Oman -- would continue their extensive government-financed infrastructure projects, Kawakabani, who is based in Dubai, told the conference.

'Government spending is the main growth driver. That is good in the current environment,' he said.

Growth in the GCC area would slow as a result of the global recession but remain clearly positive. Contrary to many other nations, the GCC countries have no financing problems thanks to hydrocarbon revenue piled up over the past few years, he said.


Kawakabani said he favours a value-based investment strategy, which currently focuses on defensives such as infrastructure, fertilisers and selected home-market focused consumer goods companies.

Ebner, too, said infrastructure spending would underpin GCC growth, estimated by the International Monetary Fund at 3.5 percent this year. She forecast 15 percent earnings growth for GCC companies in 2009. In most countries elsewhere, analysts expect profits to shrink.

Both fund managers pointed to extremely low valuations -- around 7 times projected 2009 earnings -- for Gulf stocks after last year's rout, which saw the MSCI Arabia index fall just over 50 percent, underperforming world equities, which lost just over 40 percent.

Like most emerging market funds, both Franklin Templeton's MENA fund and Frankfurt Trust's Emerging Arabia fund suffered net outflows during the global financial markets turmoil sparked by the mid-September collapse of U.S. investment bank Lehman Brothers.

Franklin Templeton and its Gulf partner Algebra Capital saw net outflows of $200 million, bringing assets under management in the region down to 'around $300-400 million,' Kawakabani said.

The Emerging Arabia fund shrivelled to 45 million euros from 400 million euros amid the stampede, which saw investors withdraw an estimated total of $50 billion from emerging markets funds worldwide, Ebner said.

'We had to sell (stocks held by the fund) to meet redemptions,' she said. 'But it has stopped, we have no outflows now. And investors are still interested in emerging markets.'

Ebner said she expects Saudi Arabia to open up its stock market for foreign investors 'in the foreseeable future' and Kawakabani said there was talk of Kuwait, Qatar and United Arab Emirates being included in the MSCI Emerging Markets index.

Eastern Europe

It’s grim out east. Emerging Europe’s unravelling economic situation this week prompted the European Bank for Reconstruction and Development to downgrade its 2009 growth forecast for its 30 countries of operation from 2.5 per cent to 0.1 per cent. Five countries, it believes, will experience recessions; Ukraine and Latvia could contract by 5 per cent. Social unrest is surfacing in several capitals.

The risk is that better-off western Europeans abandon their eastern neighbours to their fate. Already Greece has cautioned its banks against transferring funds from a €28bn support package to Balkan subsidiaries because of fears of financial turmoil. Such disengagement would be a historic mistake. Certainly, many east European countries made errors, going on credit binges fuelled by foreign currency borrowing and running up yawning current account deficits. They are suffering now, however, in large part because of their integration with the international economy. Nowhere is integration greater than in financial services: large chunks of east Europe’s banks are owned by foreign groups.

Hedge funds offers to price in gold

A hedge fund has begun offering investors the chance to have their investment denominated in gold, as worries grow over governments debasing their currencies by printing money.

Osmium Capital Management, a $178m hedge fund manager based in Bermuda, is launching a new share class allowing investors to hold shares measured as troy ounces of the fund, rather than US dollars, sterling or euros.

The move follows a surge in investor demand for small gold bars and coins held by individuals and gold-backed exchange-traded funds that are holding a record amount of bullion.

Saudi Arabia to ease regulations

As Saudi Arabia competes for foreign direct investment during the global slowdown, the kingdom has committed itself to easing business regulation and facilitating investment in energy-intensive industries this year, a top official said.

Amr al-Dabbagh, governor of the Saudi Arabia General Investment Agency, told the Financial Times earlier this week that new regulatory and procedural reforms are intended to reduce the time and capital needed to start a business. The changes form part of a strategy to place Saudi Arabia among the world’s 10 easiest countries for doing business by next year.

The World Bank’s “Doing Business in the World” survey ranked Saudi Arabia the 16th easiest country for doing business last September, up from 23rd the year before, and up dramatically from 67th in 2004. However, the World Bank noted delays in enforcing contracts and commercial legal procedures as obstacles for Saudi Arabia.

Sovereign wealth funds lose their gloss

They have vast assets and highly secretive natures, and the Gulf’s sovereign wealth funds have been the source of much speculation over the past 18 months as bankers and officials have beaten a hasty path to their doors.

Their power and ambition initially drew a negative reaction from the west but suspicions have evaporated as the financial crisis has deepened. For desperate bankers it is as if the Gulf’s sovereign vehicles – with estimates of their overall assets ranging up to $1,500bn – are a last resort of funding.

But those clinging to that perception have been forced to rethink.

SWFs have taken a battering themselves as equity markets have collapsed. Analysts suggest that they may have incurred losses of 25 per cent to 30 per cent.

Dubai rental yields ease property woes

Gulf banks may have avoided most of the toxic assets polluting the global financial system but many are overexposed to a sector that rating agencies and analysts say may prove to be nearly as poisonous – property.

After years of growth, Dubai’s real estate market is particularly exposed to the withdrawal of credit. Residential prices have dropped 23 per cent from their peak last September according to research by HSBC, the bank, and some experts are talking about a 50 per cent drop in property prices from top to bottom.

This has shocked speculators who have dominated the market in recent years, but may hearten longer-term property investors as already healthy rental yields may improve. Rental yields are a function of the income that can be earned from a property compared to the price paid. They are also an important indicator of how expensive property is and how sustainable underlying prices are.

Arcapita and Investcorp downgraded to junk

Standard & Poor’s on Wednesday downgraded two prominent Bahrain-based investment companies to junk status as signs mount the Gulf’s financial system is flagging.

Arcapita and Investcorp were both downgraded to BB+ from BBB and put on negative outlook for further downgrades by S&P, which cited the “difficult operating environment” for the two alternative investment companies.

Arcapita responded by saying that it was seeking to raise capital from regional sovereign wealth funds while Investcorp terminated its rating contract with the credit agency over what it called an “unjustified” downgrade.

Aldar profits up 77%

Aldar Properties, the largest developer in Abu Dhabi, saw annual profits increase by 77.5 per cent last year, despite sales in the fourth quarter grinding to a halt.
Shafqat Malik, the Aldar chief financial officer, said the company decided in September to “basically stop selling” for the last three months of the year because of a dramatic change in market conditions.

“We did it intentionally because of the market state,” he said. “The thing is that you need to be alert and cautious in your approach to make sure you adjust yourself to market conditions.” Annual profit jumped 77.5 per cent to Dh3.4 billion (US$926 million), while earnings in the last quarter fell by 89 per cent to Dh84m.

Ahmed Ali al Sayegh, the chairman of Aldar, said last year was successful for the company but warned that this year would see the impact of the global credit crisis and slowdown in the domestic property sector.

Sharia fund to exploit liquidity shortage

National Bonds Corporation, a Shariah-compliant savings scheme partially owned by the Government, plans to grab opportunities created by the global credit crisis and become a major regional private equity investor this year.

“During crises, people will save,” said Mohammed Qasim al Ali, the chief executive of National Bonds. “It is going to be a good year for private equity. A lot of businesses are going to be suffering from a shortage of liquidity.”

The company, which was founded in 2006, has Dh3 billion (US$817 million) worth of assets under management and about 500,000 bond holders. Investors received a 7.07 per cent return on their investments last year and the chance to win monthly prizes of up to Dh1m, the company said.

Tamweel removes detained board member

Saad Abdul Razak, who has been in detention since October, has been dismissed from Tamweel’s board of directors, the Islamic lender said yesterday.

Mr Abdul Razak, who is also a former chief executive of Dubai Islamic Bank and managing director of the Investment Corporation of Dubai, was arrested in connection with an inquiry into alleged corruption. He is still in police custody, although no charges have been brought against him.

The decision was taken at the company’s board meeting on Jan 6, and formally announced to the Dubai Financial Market in a statement yesterday.

Further market declines expected

Regional fund managers expect Middle Eastern markets will continue to decline over the next few months, but are optimistic they will rebound over the longer term, according to a survey taken of regional fund managers by Standard and Poor’s (S&P), the ratings agency.

During the past year, Middle Eastern stocks in nearly every sector declined, leaving funds heavily invested in the region with annual returns ranging from negative 20 per cent to negative 50 per cent, S&P said, although GCC funds fared slightly better than the rest.

“The region’s much vaunted low correlation with the rest of the world’s markets failed to materialise and all the major Middle Eastern markets fell significantly in recent months,” said S&P Fund Services lead analyst Roberto Demartini. The Dubai and Egyptian exchanges, which both fell by more than 50 per cent last year, were especially affected by global trends, he said.

Investors warned about risks in US

Riyadh: A top American business executive and economic expert cautioned Gulf and Arab investors against the risks of making investments in the United States at present in the wake of the global meltdown.

Addressing the Global Competitiveness Forum (GCF) in Riyadh, Peter Schiff, chief executive of Euro Pacific Capital, urged investors not to throw their wealth into the hands of Americans, who, in turn, will use them as borrowed money.

He said that it will take some five years for the world to get rid of the present financial crisis.