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Gulf Arab stock crash boosts allure of foreign cash http://today.reuters.com/news/articlenews.aspx?type=reutersEdge&storyID=2006-08-14T130202Z_01_L0670222_RTRUKOC_0_US-MARKETS-GULF-STOCKS.xml
Mon Aug 14, 2006
By Will Rasmussen
DUBAI (Reuters) - Governments in the Gulf Arab region are increasingly looking to foreign investment to fix a problem with their equity markets that was unthinkable a year ago: a lack of cash.
The world's largest energy exporting region has long been a net exporter of capital. As oil revenue poured into Gulf equities, lifting them to record highs last year, authorities had little incentive to open bourses to foreign investment.
A stock market crash early this year changed all that. The capitalization of Gulf Arab markets has shrunk by about $500 billion since February, and analysts say much of that money left for other asset classes such as real estate. Daily turnover has tumbled, sometimes by 90 percent from pre-crash levels.
So governments are looking to foreign capital to inject liquidity, create stability and in the process restore confidence in stock markets that have become the cornerstone of their plans to redistribute oil wealth.
"Because of this crash there is a sincere intention to reform aided by the private sector," said Haissam Arabi of Dubai-based investment bank Shuaa Capital.
"With demands for fresh liquidity they (governments) are starting to see the need to allow more foreign participation."
Restrictions on foreign share ownership vary across Gulf markets, which have an estimated total capitalization of $850 billion, about 15 percent of the value of all emerging markets.
Despite their size most bourses are dominated by retail investors. Many are day traders who are blamed for much of the volatility in regional markets.
"The Gulf markets are driven by retail investing, a lot of which is speculative and not research driven," said Arindam Das of HSBC Bank Middle East. "The markets will be more balanced with institutional investors."
INTERVENTION
In Abu Dhabi retail investors make up about 80 percent of the free-float market capitalization. The exchange's director general says he wants to see institutional investors account for 80 percent of the market as soon as possible.
Gulf governments have tried to stabilize their bourses through the giant state-controlled funds that invest surplus oil cash. But they are increasingly reluctant to intervene and are trying instead to build modern, efficient capital markets.
"Foreign institutions...will be the only ones with sufficient volumes to replace the retail investor who will disappear from this market for a while, licking his wounds," said Ali al Shihabi, chief executive of Dubai-based Rasmala Investments.
Foreign investors have long been looking for opportunities to tap into the oil boom but they have been deterred by three major impediments -- high valuations, legal barriers to entry and a poor regulatory environment. But the crash has slashed valuations that in some cases topped 40 times annual earnings when they peaked before February.
Kuwait's stock market has an averaged trailing price-to-earnings ratio of 10.76, according to Kuwait's Kamco Asset Management, better than the average of 13.7 for MSCI Barra's emerging markets index.
Kamco said Dubai was trading at 12.22 trailing earnings and Saudi Arabia at around 24.33. In both cases valuations are roughly half what they were at their peak.
BARRIERS
"The correction has created an opportunity for international investors who've wanted to get into the region," Arabi said.
And the investment barriers that have cut off the region from international institutional capital and kept it out of MSCI's main emerging markets index <.MSCIEF> are being dismantled.
Saudi Arabia, the largest Arab market, allowed foreign residents to invest in the bourse early this year and eased some other restrictions on Gulf-based funds last week.
Kuwait, the Gulf's second-largest market, is considering changing a rarely enforced law that taxes foreign investment in Kuwaiti stocks.
In the United Arab Emirates a growing number of companies on the Dubai and Abu Dhabi bourses are deciding to open share ownership to foreign investors. "Dubai had fewer than four or five companies open to foreign investment last year and now there are more than 20," said Das. "There are about 33 companies in Abu Dhabi open to foreign ownership."
Qatar allows foreign ownership of up to 25 percent of a company's floated shares, with Oman allowing up to 70 percent.
Even the regulatory environment is improving, although share prices still tend to move before major announcements.
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