FRONTIERS-Gulf stocks offer alpha, if you know who to ask

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* Runaway fundamentals make some Gulf markets alluring

* Weak governance, poor liquidity are among hazards

* Trading cartels regularly stir up day traders

By Matt Smith

DUBAI, May 26 (BestGrowthStock) – When Kuwait investors received
anonymous text messages in the dead of night urging them to buy
shares in telecoms operator Zain, they did something not many
people in developed markets do. They paid attention.

Their demand helped the company’s stock soar 23 percent in
five February trading days, before the firm announced it would
sell African assets in a $9 billion deal.

It’s just one example of the risks an investor expects in
any “frontier” market, but particularly the Middle East.

“Kuwait has some well recognised companies, but it has a
number of challenges in terms of Western perceptions,” said
Daniel Broby, chief investment officer at London-based Silk
Invest. “One is that locals are selective with their information
and favour friends and family.”

Kuwait may be the trickiest market. Last July, Kuwait
financier Khalid Al-Braikan committed suicide after being sued
for fraud by the U.S. regulator, alleging he was importing shady
practices into the United States. But the hazards are similar
across the region.

Wealthy local investors in traditional white dish-dash robes
and sandals congregate in stock exchange pits, chatting with
friends and calling in bids on the back of the latest rumors.
It’s a challenge to profit in markets largely populated by
excitable small-time day traders, where stock moves can seem
totally random and company news can come first not by official
announcement, but in a nod from friends and family.

For those who have the guts and the resource to venture in
and do their own research, however, some argue that Gulf markets
may have potential to offer foreign investors returns that are
uncorrelated to global stocks.

Looking beyond the shock of Dubai’s debt crisis, investors
in the world’s top oil exporting region see some of the most
compelling stories globally, especially in Saudi Arabia and
Qatar whose benchmark indexes surged early in the year.

A May sell-off has wiped out these gains, with Qatar now
down 4.5 percent year-to-date and Saudi Arabia down 5.9 percent,
but both have outperformed a near-13 percent decline in the MSCI
emerging markets index.


Valuations of Arabian markets and developed world

Gulf market performance

Gulf market correlation with developed markets



The region’s young population, flush with cash from this
century’s oil price boom, gives much of it an enticing
demographic and economic outlook: Qatar’s economy is forecast to
grow by more than 18 percent in 2010 according to an April
estimate from the International Monetary Fund (IMF); Saudi
Arabia has embarked on a $400 billion infrastructure spending
programme as it seeks to diversify from energy.

Universities, science and technology parks and supermarket
chains are among the projects attracting foreign investors to an
investment story that, while it may be underpinned by oil, runs
from infrastructure to finance and consumer goods.

“Gulf markets do not command a valuation premium because the
transparency is not great,” said Ghadir Abu Leil-Cooper, Head of
EMEA Equities at Baring Asset Management.

“We believe that in the next decade, because of these
demographics and the infrastructure spend, these markets should
open up and there should be better corporate transparency.”

After trading at a discount to the developed world since
late 2008, the MSCI Arabian markets index trailing p-e ratio of
just over 20 times at end-April was a nose ahead of developed

Where the global crisis has brought equity markets crashing
down in unison, some analysts believe Middle East stocks could
return to a historic trend that is — at least to a degree —
decoupled from world and emerging markets.

For this to happen, oil prices would have to arrest a recent
sharp slide. The strong link between Gulf equities and oil,
itself closely tied to the world economy, means Middle East
stocks are to an extent driven by global fundamentals.

Haissam Arabi, chief executive and fund manager at Gulfmena
Alternative Investments in Dubai, argues that today’s investment
environment is similar to that of early last decade. Then
developed economies slashed interest rates to stimulate growth
in the wake of the dot-com crash, and Saudi stocks surged as oil
prices rallied.

“Bank deposit rates were at 0.5 percent, so investors chased
dividend yields,” Arabi said. “Nothing has changed, it’s just
that the magnitude of this crisis was higher and more prolonged
— it’s the same boom-bubble-burst scenario.

“We are correlated to major news on global markets — at any
point there will be a correlation, but it’s the magnitude of
correlation that matters.”

U.S. crude oil is expected to average $81.06 a barrel in
2010, according to a Reuters poll in April: oil is trading at
around $68 now. Growing demand in emerging economies, especially
China, are prime drivers.

“Qatar leaves China in its dust,” said Daniel Tubbs,
co-manager on Blackrock’s emerging market fund, which handles in
excess of $2 billion in emerging markets and whose investments
include Qatar and Saudi stocks.

“Qatar has been growing extremely rapidly. Although it may
not sustain that rate forever, we think it is a lot more
sustainable than a lot of other markets in the Middle East.”

The population of Qatar, already the world’s richest per
capita thanks to its exports of liquefied natural gas, is
expected to nearly double to 3 million by 2022.

Saudi Arabia’s economy is forecast by the IMF to expand 3.7
percent this year, while more than a third of its 29 million
people are under 15 and its population is growing by nearly 2
percent a year.

“From our point of view, it’s an underdeveloped consumer
story,” said Baring’s Leil-Cooper. “With high oil prices, there
is enough cash to carry on with infrastructure investment to
support the population growth.”

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FRONTIERS-Gulf stocks offer alpha, if you know who to ask