Aug 05 2012
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Death of equities?
It is tough to argue about the death of equities in the Middle East just as they have come roaring back to life, but if you plot their performance over a ten-year cycle, it is clear that the regional markets are but a mere shadow of their former selves.
There is widespread dismay among the global investing classes and even the most passionate advocates of financial markets are despondent.
"The cult of equity is dying," said Bill Gross, the legendary investor and co-executive PIMCO which runs the largest bond fund in the world. In his monthly investment newsletter, he also revealed that he believes the cult of bond is dying as well.
"Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors' impressions of 'stocks for the long run' or any run have mellowed as well. I tweeted last month that the souring attitude might be a generational thing: "Boomers can't take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money."
The situation is somewhat different in the region: the Middle East has the money but little faith in the markets, and there is that age-old argument that tugs at the investor: where are the returns? But, more about the region later.
Mr. Gross argues that the era when stocks yielded average returns of 6.6%, as expounded by economist Jeremy Siegel, is now over.
"The Siegel constant of 6.6% real appreciation... is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned," said Mr. Gross.
While western analysts wonder why stock markets are not behaving well and why it is showing few signs of sustainable growth even in the long run, it's time for us to take stock of our own markets.
Are the regional markets engines of growth? Are they able to attract new companies, seeking fresh funds and helping them grow. Do the regional stock markets expand the pool of companies looking for financing and the number of investors willing to participate?
Are they any good examples of entrepreneurial companies listing on markets that make their founders overnight millionaires, in the process inspiring a new generation of entrepreneurs, who yearn to do the same?
The answer to most of these questions is largely 'no'.
A quick look at the ticker charts of regional exchanges tells the story: state-owned banks, duopolistic telecom giants and state-sanctioned real estate companies dominate the list.
The depressing number of IPOs in the region over the past few years also highlights the problem. More than 50 companies raised USD13-billion in 2008. By 2011 that figure had fallen to 28 companies raising a mere USD853-million, according to the Zawya IPO Monitor.
"The key trend last year was that the market did not manage to find an equilibrium; there wasn't a good balance between investor demand for IPOs and supply," said Georg Hansel, chairman of the EMEA Equity Capitl Makets at Deutsche Bank.
"In that regard, we haven't had a proper IPO markets since 2007. In 2012, I'm hoping that the market will continue to stabilize and we'll see a reversal of that trend."
But what you will never hear an investment bank says is that it may not just be a fleeting trend - it could be a structural shift.
A McKinsey study late last years shows that barring an extraordinary change in investor behaviour in the largest emerging economies, the role of equities in the global financial system will likely be reduced in the coming decade.
McKinsey's estimates are instructive: Global asset allocation is set to more than double from USD198-trillion to USD371-trillion over the next ten years, but the portion of assets parked in equities is expected to fall from 28% to 22% during the period.
"The financial assets of investors in emerging economies will rise to as much as 36% of the global total by 2020, from about 21% today. But unlike in developed countries, the financial assets of private investors in these nations currently are concentrated in bank deposits, with little in equities."
While roughly 47% of American household wealth was tied to equities in 2010, only 18% of Middle East North Africa household was focused on that asset class. Stock markets fared even worse in other emerging economies, with Chinese households keeping 14% of their assets in equities and 10% for emerging Asian households.
McKinsey believes that the pattern of investors willing to put some money at risk in equities to achieve higher rates of return is coming to an end.
However, other factors must also be in place for equity markets to thrive: rules and regulations that protect minority investors, transparency by listed companies, sufficient liquidity in the stock market, the presence of institutional investors, and easy access to markets by retail investors.
"Even where appropriate regulatory frameworks have been erected, enforcement often has been weak. Limited visibility into corporate performance and little accountability to public shareholders put outside investors at a further disadvantage. Not surprisingly, in a recent survey, more than 60% of investors in emerging Asian economies said they prefer to keep savings in deposits rather than in mutual funds or equities--a figure that has changed little over the past decade."
Fund managers have not helped their cause either. Two major global equity crashes within a decade, coupled with reckless lack of accountability, poor returns and a series of deceitful practices, trading debacles and government bailouts has hurt the reputation of money managers as agents of wealth creation.
The disappointing performance of fledgling markets such as Nasdaq Dubai suggests that regional companies are not keen on tying their fortunes to shallow markets with low liquidity.
Governments know this. Emirates Airline, Dubai Electricity Water Authority, and Dubai Aluminium clearly don't see the value of listing on regional markets, as they can easily get the funding they need from banks without the inconvenience of dealing with retail investors and forever keeping an eye on their share price.
Who can blame them?
Other regional governments continue to partially privatise companies but retain controlling stakes, leaving retail investors with no say in the direction of the company. Saudi Arabia is keen on listings - which serve as a mechanism for the authorities to share the wealth with average Saudis - but beyond that token participation, retail investors have little say in the development of those companies.
It seems unlikely to change any time soon. With regional markets fragmented, and enable to attain emerging market status, few companies could see the value of listing their own stocks. Financial markets are self-feeding beasts: the more companies list, the more investments they attract and the more companies are willing to list. Alternatively, the fewer tradeable companies on the list, the smaller the investor pool and an equally small corresponding pool of companies willing to list on the exchange board.
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