Makaseb (Mashreq) Monthly Commentary for April 2009 (PDF)

• Corporate earnings for the quarter have been broadly in line with expectations. For the top 10 banks (by market cap) in the region with details out so far, Net Loans are down 1% sequentially, while balance sheet size has fallen 1.5% for the quarter. On the operating front, real estate results lok similar. In Saudi Arabia, Sabic produced a stunner for the quarter, reporting a loss of SAR 974 million for the quarter, on the back of a SAR 1.2 billion good will write down related to their plastics business. Excluding the write down, net profit would have been SAR207 million for the period; accounting for Sabic’s share of Saudi Fertilizer’s profit of SAR 525 million (SAR 225.6 million for Sabic) for the quarter implies that as a whole, Sabic’s operating profit was about zero, undoubtedly due to the negative contribution of the plastics division
  
• Market strength (although over a very small period of time) in the face of weak operating performance may be perplexing to some, but makes perfect sense. Correlation between earnings and price performance in the short run is very low, and a similar relationship (basically none) holds between capital market returns and GDP growth over the short term. Counter trend bear market rallies tend to be quick, and large. Investors should be clear that the entire region has been in a bear market since about late 2005-for an emerging market this is a pretty long bear, now almost 4 years and counting. The level of recent volatility, the almost universal sense of doom regarding the region’s economic prospects, and reluctance of professional investors to participate (as evidenced by most regional funds having high cash and fixed income allocations) would suggest that the process of finding a bottom for this great bear market has begun
  
• Corporate earnings are not likely to provide much to cheer investors in the near term. Capital markets will remain volatile as investors take their cue from random variables (like the return of the S&P 500 Index from the day before) with limited relevance for the region. A strategy of gradually adding risk to portfolios, while focusing on fundamentally sound names, will pay rich dividends over the long run. As yet, it is not the time to be adventurous.