Jul 08 2012
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Return of investors?
The greatest fear among remaining market participants was that those investors may never return. Many brokerages closed shop as investors' lost their appetite due to falling stocks and the vicious circle of lack of interest and declining economic sentiment pulled markets further than their fair value.
The lack of investor confidence also put the brakes on initial public offerings (IPOs), which are now seen a rare occurrence.
Many companies pulled or delayed their public listing plans, citing tepid market conditions and feared a lack of investor appetite. As such, markets failed to gain the breadth and depth needed for a healthy flow of investments and choices and encouraging the investment pools to grow.
But new data on volumes in the Gulf markets suggest investors may be tentatively dipping their toes back into the market.
The first half of the year saw USD368-billion trading collectively in Gulf markets. That has already exceeded trading for 2010 and 2011. Given the current trajectory, Gulf markets are set to exceed the USD512-billion worth of trade posted in 2009.
"Average daily value traded increased in most markets across the GCC in 1H2012," notes NBK Capital in a report to clients. "The Tadawul Exchange showed an outstanding pick up in trading, as the average daily value traded increased to USD2.7-billion in 1H2012, more than double the average daily value traded in 2011, marking the highest average daily traded since the 2008 credit crisis."
The Dubai Financial Market and Kuwait Stock Exchange also showed an increase in average daily trading activity between 2011 and IH2012, increasing 127% and 18%, respectively. However, the Qatar Exchange and the ADX were the clear laggards, as the average daily value traded declined in each market by 11% and 8%, respectively.
But there is a long way to go for most markets to re-scale the peaks reached previously.
At the height of the Gulf market buzz, the Saudi Tadawul saw trades worth USD1.4 trillion in 2006.
Dubai FM had its best year in 2005, posting a USD110-billion worth of trades, at a when Gulf markets could do no wrong.
Meanwhile, Kuwait's best year was in 2008 with USD134-billion, primarily as investors were deleveraging and fleeing the market, especially from the financial services sector.
Of course, the Gulf economies have made massive improvements over the past year with greater growth and government spending lifting the prospects of many key companies.
This has been most visible in Saudi Arabia where USD131-billion investment package has unleashed a wave of contracts in the country.
Regional markets have also benefited from greater prominence due to Qatar and UAE's potential elevation to emerging market status.
Gulf markets also appear to fare better than their emerging market counterparts on a number of criteria. Given their growth trajectory, their valuations seem far more attractive than BRIC states and G7 nations.
GCC's price-to-earnings (PEG) growth ratio is close to 1.0x, compared to the G7's 5.0x and BRIC's 1.4x, according to data.
"Qatar seems to be the most attractive among its GCC peers as it trades at the lowest PE multiple in the region of 8.6x with one of the highest GDP growth rate expectations for 2012," according to NBK Capital. This puts the country's PEG ratio at 0.7x compared to the weighted regional average of 1.1x."
Regional markets also offer greater dividend prospects for investors. The weighted average dividend yield in the GCC stands at 3.5% compared to 2.5% for BRIC markets. The UAE and Qatar are even more attractive, offering dividend yield of 4.5% each.
MSCI's recent suggestions that it could include Saudi Arabia as an emerging market at some point may also pique the interests of many international and regional investors.
However, none of these developments take away from the fact that the markets need greater depth of companies. With the exception of Saudi, Gulf markets are dominated by banks, real estate and telecom companies, with many of the sectors such as energy, power, tourism, retail and services under-represented in regional indices.
Hopefully, the rise in trading volumes would also encourage companies to list on the exchanges buoyed by resurging investor interest.
Zawya data shows six Gulf companies raised USD1.1-billion to list on regional exchanges in the first half of the year, which is at least three times greater than the value raised during the same period last year. But it is a shadow of the glory days of the first half of 2007 when 42 companies raised more than USD5-billion in a frenzy of activity.
It may take a long time before such volumes once again return to the regional markets. But rising trading trends could unleash the pent-up desire for regional companies to list on the markets, especially as the global financial services sector takes a beating. And that could attract new waves of investment to the market and, consequently, fresh batches of investors.
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