Soaring Gulf Arab bourses seen losing steam
Tue Dec 20, 2005
By Haitham Haddadin
KUWAIT (Reuters) - The long bull market in Gulf Arab stock markets is likely to lose steam in 2006 as investors react to slower earnings growth and valuations that are far above historical averages, analysts say.
An oil boom has transformed the once illiquid bourses of the world's top energy exporters, taking total market capitalisation in Saudi Arabia, Kuwait, Oman, the United Arab Emirates, Bahrain and Qatar to $900 billion (510 billion pounds) from $135 billion in 2001.
While analysts do not expect a crash, they say the momentum of the rally will be tough to sustain in the Gulf's markets, most of which are trading at price-to-earnings ratios of over 30, compared with 10-15 for most emerging markets.
"It is safe to say that you are not probably going to get the same kind of run-up that you had already," Mark Mobius,Managing Director of Singapore-based Templeton Asset Management, told Reuters.
Mobius said the boom was not about to go bust, but high stock valuations in Gulf markets apart from Kuwait meant investors could find better value elsewhere, especially in emerging markets.
He said the main share indexes of Saudi Arabia, Kuwait and Qatar were up 98 percent, 87 percent and 68 percent this year, respectively, compared with a rise of 15 percent in Japan and 4.5 percent in the United States.
NOT EASY MONEY
Petrochemical firm Saudi Basic Industries (SABIC) has a price-to-earnings ratio of 44 versus 11 for U.S.-based Dow Chemical. Saudi Telecom and Emirates Telecom trade at 31 and 29 times earnings, compared with 9 for Telefonos de Mexico.
"Investors need to go professional; it is no longer easy to make money in those (Gulf) markets," said Omar Abdullah, head of Middle East North Africa Capital Markets at National Bank of Kuwait.
Largely off-limits to non-Gulf investors, the six regional stock markets are up 90 percent this year and have risen sevenfold in the last five years, with daily trading volumes now reaching $3 billion, according to NBK.
While during much of the rally, stocks were driven higher by optimism on soaring oil prices, Saudi shares have been helped recently by a shortage of new public offerings and a surge in money supply.
"There's increasing liquidity, while IPOs are very limited," Beshr Bakheet, managing director of Bakheet Financial Advisors, told an investor symposium in Kuwait City organised by NBK.
"Therefore all this money entering the national economy as a result of high petroleum prices chase a small number of stocks, pushing them higher, thus forming this bubble," he said.
Bakheet expects slower earnings growth, particularly in Saudi Arabia, the Arab world's biggest stock market, which has a 2005 price-to-earnings ratio of 35, compared with its historic norm of 10 to 25 times earnings.
He forecast earnings growth of about 20 percent in 2006, compared with 50 percent in 2003 and 30 percent in 2004.
"There are other opportunities (abroad) that the local investor will look to sooner or later when he notices a retreat in profits growth in the region," Bakheet said.
"UNDERLYING PROFITABILITY"
Henry Azzam, chief executive of Jordan-based investment bank Amwal Invest, says another key measure, price-to-book value, was also high in the region, compared with a globally accepted safety level of two.
Price-to-book value is more than five in Jordan, six in Qatar, seven in the UAE and 8.6 for Saudi Arabia.
"The underlying profitability of many listed companies, especially their core business activity, is nowhere close to those levels," said Azzam, who has been named chairman of the UAE's new bourse, Dubai International Financial Exchange.
But Azzam and other analysts see little room for a crash, given the fundamental strength of the region's economies, which are experiencing their biggest boom in decades and massive government spending.
"But there's no question that there is tremendous growth potential with the oil and gas. And if they play their cards right, it's not necessarily a shot in the dark," Mobius said on the sidelines of the seminar.
Saudi stocks got a boost earlier this month from news that the government would run a record $57 billion surplus this year and plough some of it into infrastructure.
NBK's Abdullah told the seminar that state outlays would attract more expatriate workers, create jobs, drive credit expansion, consumer spending and demand for real estate.
He said that with oil and gas production levels tapering off elsewhere, the Gulf would remain the world's primary energy supplier.
"This will mean a sizeable trickle-down effect in regional economies."
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