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Year-end Rally?

03 November 2011
Poor analysts. Every time they have hinted at the green shoots of recovery, an avalanche of bad news has demolished all hope. So can we believe their call for a year-end rally? Poor analysts. Every time they have hinted at green shoots of recovery, an avalanche of bad news has wiped out all hope. So can we believe their call for a year-end rally?

But first a word of caution: Like all stock market stories these days, this one could well have a shelf life of exactly 24 hours.

It was only last week when most analysts had heaved a collective sigh of relief on signs of a concrete European solution. Traders were talking about a year-end global relief rally, building on an excellent October to make up for a pretty forgettable year.

By Tuesday morning traders were running for cover, as the Greek government dropped a bombshell that it would seek a referendum on the austerity measures, leaving the Germans - who are essentially footing the bill - fuming.

Here in the Middle East there are also grounds of hope and murmurs of a market rally. MENA markets were quite positive last week, with Saudi Arabia and Qatar gaining substantial ground.

A Markaz report study noted that last week 62% of the 13 corporate research reports had Buy rating, 31% Hold and only 8% issued sell recommendations.

Emboldened by favourable winds, Shuaa Capital has put forth the idea of a year-end rally for UAE markets.

Its 5 reasons:

1. Clear exhaustion followed by strong pick up in buying power;

2. Foreign institutions representing the main net buyers during the high-volume rally last Thursday (again, not conclusive but definitely indicative). Building posi­tions ahead of the week-end should not be taken lightly;

3. A European resolution that should, hopefully, buy enough global comfort time until the beginning of the year (this is when European leaders are expected to discuss the nitty-gritty of their bailout plans, hence, the time for potential hic­cups);

4. Signs of positive re-coupling among and between regional and global equity markets;

5. Lagging regional equities in a global risk-on environment that favors stocks;

In short, Shuaa Capital analyst Adel Merheb is calling for a 13-16% gain in Dubai Financial Market Index by the end of the year.


Merheb's breakout call is warranted, given that Dubai stocks have been paralysed for at least a few years now. Other indicators Shuaa highlights is growth in Qatar and Saudi Arabia, which show that MENA markets are decoupling slightly from the global doom.

It all makes sense, except for Reason No.3 - the European resolution - that looks more shaky today than it did yesterday.

But Shuaa is not alone in its optimism. Investment bank Rasmala is suggesting a supercycle growth for Sabic, easily the most important stock in the most important exchange in the region.

Rasmala thinks Sabic stock is a good way to gain MENA exposure and all the fundamentals suggest the petchem giant could burst into supercycle growth.

"As petrochemical demand is closely correlated to GDP growth, the relevance of the fear of a double-dip recession is material for SABIC," noted Rasmala analyst Hans Zayed.

"Whether a global recession will materialise is yet to be seen, but RBS economists in Asia, the main end market of Middle East petrochemicals, are still relatively optimistic and expect continued growth in Asia, even if lower than in previous years, to be able to offset weakness in Europe and the US."



Cost-effectiveness and an ambitious production ramp up over the next few years will see Sabic grow around 5-6% over the next few years.

However, a bear scenario will see Rasmala cut Sabic forecast by an astonishing 40%.

Religare, the frontier market investment bank, has also picked the UAE as one of its favourite plays, citing a potential MSCI upgrade that could trigger a rally.

Egyptian investment bank EFG-Hermes has the exact opposite view, reiterating that Qatar and UAE are unlikely to be upgraded to MSCI EM in MSCI's Market Classification Review in December, due to the lack of progress in addressing MSCI's concerns on DVP implementation and (in Qatar's case) low foreign ownership limits.

"Indeed, we estimate that an insufficient number of stocks in the UAE index now pass MSCI's minimum market cap threshold for EM status," says EFG. "We believe the market shares our view on an upgrade and the announcement should have no market impact."

Religare's other major pick is Egypt. "The Egyptian index was the best performer in the region in October, rising 7.6%," noted Emad Mostaque, MENA strategist at Religare.

"We moved Egypt to a strong buy at the end of September and we remain positive on the market with continued positive news-flow likely into an aggressive election season with more foreign financial support coming in. The market remains cheap and we note that almost all investors we speak to have either heavy under-weights or no position at all in the market. A potential IMF deal would be the most proximate catalyst."

The MENA market have been poised for growth - they have been poised to take off for quite a few years now. There are many reasons not to: uncertain global economy, social unrest across the Arab World and lack of meaningful private sector growth.

But the banks are in good health, government spending has been robust and Asia - its key market - continues to post steady growth.

Yet again, it remains an eternal battle between bulls and bears. © alifarabia.com 2011