Gulf Stock Markets Buoyant, Despite Global Slump

VOL. XLV

No 29

22-July-2002

CAPITAL MARKETS

Gulf Stock Markets Buoyant, Despite Global Slump

Stock markets in the US and Europe continued to fall this week as recent accounting scandals at Enron and WorldCom in the US caused a widespread loss of confidence among investors. In London the FTSE 100 has fallen 24% from its recent peak in mid-May and 43% from its all-time high of 6,930 points in 1999. In the US, the Dow Jones Industrial Average has fallen 17% from its most recent peak of just over 10,500 in March this year, and lies 26% below its historical high of over 11,700 at the beginning of 2000. The Nasdaq and the S&P index have also recorded heavy falls. The current falls in the US and Europe follow two years of steady decline in stock markets in those countries, a situation compounded by global recession and uncertainty following the 11 September attacks in the US.

Arab stock markets, however, have enjoyed a rather more mixed first half of 2002, MEES findings indicate. The region is somewhat insulated from negative sentiments in the US since the larger Gulf markets are relatively closed to outside investors, and the rest of the Middle East region receives a small proportion of global foreign direct investment (FDI). Nevertheless, the global recession, regional uncertainty caused by the ongoing tensions in the Palestinian territories, reports of impending US action against Iraq, and rising premiums on emerging market bonds all add up to create a fairly bleak outlook for the non-Gulf markets. With no resolution of the Palestinian-Israeli conflict in sight and the exact nature of US plans regarding Iraq uncertain, this state of affairs is likely to continue. In addition, regional tension will undoubtedly reduce levels of tourism in the region – a key foreign currency earner for Egypt and Jordan in particular.

Despite this seemingly unpromising backdrop, some Arab markets have performed well with seven posting gains and five recording declines in first half 2002. The best performance has been seen in Kuwait where the index has climbed steadily from a level of 1,700 at the start of this year to around 2,225 at the beginning of July (a gain of some 31%), and it has continued to rise since then. The growth in Kuwaiti stocks has been attributed to high oil prices, healthy company results and renewed optimism in the government’s economic reform program. Kuwait has also benefited from recent upgrades to the country’s long-term and short-term foreign currency ceiling awarded by Standard and Poor’s (S&P) (from A/A-1 to A+/A-1) and Moody’s (from Baa1/Prime-2 to A2/Prime-1 – MEES, 15 April and 20 May). Following these upgrades Moody’s upgraded a number of Kuwaiti banks with strong market capitalization from Baa1 to A2 (MEES, 3 June), including National Bank of Kuwait (NBK) which was also upgraded by Fitch from A to A+ (MEES, 1 July). The positive effect on Kuwait’s banks has helped to boost the whole of the local market.

The Saudi market, the largest in the Arab world with a market capitalization of around SR318bn ($85bn), has benefited particularly from strong oil prices, healthy performance in the banking sector with double digit growth in 1Q 2002 and strong earnings by the Saudi Electricity Company after years of losses. The result has been a rise in the Saudi index of 13.2% in first half 2002, although this was down from the high of more than 20% reached in early May. The market’s good performance in first half 2002 is expected to continue into second half 2002 and market capitalization is also expected to increase on the sale of 15% of Saudi Telecom later in the year.

The Doha Stock Market has also performed well, buoyed by Qatar Telecom which accounts for around 40% of market capitalization and daily turnover. Doha ended first half 2002 up 23% following a strong year in 2001 which saw the index climb 37%. In Oman, the Muscat Securities Market rose 21% from 152 at the beginning of 2002 to 185 at the beginning of July. UAE stocks rose only slightly by 2.6% while the Bahrain market remained relatively flat, rising by just 1.4%. Bahrain’s market has been weighed down by the announcement that the market heavyweight Bahrain Telecommunications Company is to lose its monopoly over the telecoms sector (MEES, 17 June). The relatively strong performance of Gulf markets as a whole has been attributed to the low returns on the dollar (to which all the Gulf currencies are officially or unofficially pegged), and the general easing of domestic interest rates in line with US interest rates, boosting the lending and investment climate in the region. High oil prices have played their part, and the fall in international markets has also encouraged some large Gulf investors to return to local markets in the hope of finding higher returns.

Outside the Gulf region the picture is rather less rosy. Markets across North Africa and the Levant have fallen over first half 2002 as a result of regional uncertainty and the negative effects of the global recession. Predictably, the worst hit was the fledgling Palestinian market which has had difficulty even functioning under the Israeli re-occupation of the West Bank. The index for the four traded stocks was down 12% in first half 2002. The listed companies are experiencing serious difficulties operating in the current conditions in the occupied territories and as a result prospects for the market look bleak at best.

The Moroccan exchange in Casablanca was down almost 10% at the beginning of July and has fallen 16% below its level at the beginning of the year. This follows a disappointing 2001 which saw the Casablanca market fall 7.4%. Similar but slightly less dramatic falls have been seen on the Tunis and Cairo & Alexandria stock exchanges. In Egypt the market was down some 6.4% in first half 2002, and 30% below its most recent peak in September 2001. Investors in Egypt have remained cautious due to poor corporate performance and weak economic growth, and a shortage of foreign exchange has scared off foreign investors worried about their ability to repatriate profits. The Tunisian market entered a correction phase in 2001 after a buoyant performance in 2000, and the fall has continued into 2002, with the index down 6.3% in the first half of the year.

The one bright spot outside the Gulf has been the 'Amman stock exchange in Jordan which has climbed 6.3% in first half 2002 to reach its highest level since 1998 on top of a 30% rise in 2001. The Jordanian industrial sector has performed particularly well gaining 25.5% while the insurance and services sectors were up 7% and 6.7% respectively. Strong economic growth combined with healthy corporate performance and economic liberalization have brought about the right conditions for the Jordanian market to flourish. In the past week, however, there has been a reminder of the negative effect of regional political uncertainty on Arab stocks as the 'Amman exchange was battered amid fears that US attacks on Iraq could seriously disrupt the Jordanian economy. Iraq and Jordan are major trading partners and Jordan receives all of its oil from Iraq at discounted prices. The 'Amman share index fell 2.17% on 15 July, and although the market shrugged off worries about the impact of any future attack on Iraq over the course of the rest of the week, the episode nevertheless demonstrated the ongoing vulnerability of regional markets to political uncertainty.