If a really close friend advises buying shares in a company without offering any other details, a good investor would unearth them somehow, no matter who that friend is. Especially under current market volatility.
But what do you do in Gulf Co-Operation Council markets, a region with so much cash and growth potential, but so little oversight and information? You read the writing on the wall. And here’s the headline: buy long, not short.
Gulf equities offer some of the best outperforming odds out there. Not only have they lagged behind other emerging markets by a long shot, but the underlying economies buoying them will take off with an oil price rebound. But when to buy?
Despite encouraging recent signs, a short bet seems too risky. First, there is the traditional summer sell-off, which will probably be more profound this year, especially because foreign capital flooded regional markets during the global two-month rally since April. The momentum is now deflating though as reality catches up to chimeras and an unpredictable round of profit-taking firms up.
Gulf markets have already shed about half of their gains this year in a matter of days. And the revision will be more profound as regional resurging optimism crashes with reports that two of Saudi Arabia’s biggest conglomerates will have to restructure some $10 billion in debt, causing ripple effect throughout the GCC.
The case involving Saad Group and Ahmad Hamad al-Gosaibi & Bros Co (AHAB) illustrates the lack of oversight and transparency in the region, especially because the companies have to come forward to disclose the full extent of their troubles. United Arab Emirates and Oman have already acknowledged they were exposed, which means Kuwait and Bahrain almost certainly were as well, and probably Qatar. For investors, especially foreign funds, it is an unwelcome sign that mines confidence on corporate management.
Riyadh has come quickly to the rescue with muscular measures that intend to promote more commercial bank lending, although these may still be insufficient. It also highlights the lack of transparency in the private sector and the reliance on government driven macroeconomic policy.
But perhaps the best argument against betting short in the Gulf is the recent recovery of oil in commodity markets. Recent $70-a-barrel prices do not reflect global supply and demand fundamentals in the long term. Prices will likely once again fall slightly to range between $60 and $70 a barrel because it is too early to call a bottoming of the economy.
The dollar is also expected to strengthen and fuel and oil stocks, including those in the Gulf, will continue to buffer any price recovery. Non-commercial futures oil contracts are far from showing the buoyancy of yore. And that will only be compounded by lagging Opec quota discipline as prices increase, although as usual the GCC remains the most compliant.
Don’t forget, which many people inexplicably seem to, this is the worst global recession in 80 years and hardly enough time has gone by to even gauge how effective government recovery efforts have been. Global equities appear to be correcting recent unjustified rallies and a second wave of recovery might well be necessary.
All in all, Gulf markets are likely to deepen their corrective drive into the third quarter and could all together erase this year’s gains. And the necessary price support, which will inevitably be linked to oil prices, will probably not be guaranteed until 2010. Somewhere along the way, once risk appetite returns and regional markets bottom out, foreign investors looking for long-term gains will return in force. Increased volume of traded shares, coupled with sustained gains, will mark the opening bell, so to speak.
Bargain shopping
Emerging equity markets so far this year have gained about 30 percent, largely on the back of China, India, Brazil and Russia. Compare that to the less than 10 percent rise in the regional benchmark Abu Dhabi General Index, which is slightly underperforming the GCC’s biggest exchange Saudi Arabia’s Tadawul All Share Index, while Qatar’s Doha Exchange is already in the red.
But then there are also those signs that a strong and stable recovery will follow.
Saudi Arabia recently approved trading debt securities; NYSE Euronext took a 20 percent stake in Qatar’s redefined bourse; Kuwait will incorporate derivatives in its exchange and chose Nasdaq OMX Group to develop its trading system; Kuwait already trades stock futures and options, and the Nasdaq Dubai, the Abu Dhabi Securities Market and the Doha Securities Market are also planning to add derivative platforms.
Additionally, recent surveys show business confidence rose in the second quarter; several companies and countries have successfully sold bonds or plan to do so, and proactive government intervention across the region is lending much needed support.
Together, this means foreign and local investors trust that while transparency is far from perfect, things will improve on policy-driven initiatives.
And even though the region’s largest economies, Saudi Arabia and the United Arab Emirates, are expected to contract this year, forecasts point to a broad growth recovery in 2010 on the back of oil prices that should average around the $75 a barrel, if not more, depending on how quickly stimulus packages work.
That means that the lows that will probably be reached this summer, similar to those five years ago when trading was incipient and disclosure was even worse, are a compelling argument to buy long, especially as regional recovery will also be attached with economic and market regulation reforms that will improve confidence.
This crisis, like elsewhere, will expose the most bearish elements weighing on the market and governments are already moving to diversify in order to attract more foreign investment required to stabilize their economies. This can only mean good news for those who are willing to wait for a return to global growth, an inevitable surge in oil prices, and awesome gains in GCC exchanges.
Andres Cala - Madrid-based freelance journalist and political scientist specialising in Middle Eastern and European policy, as well as global energy issues
