DUBAI: Gulf equity markets are set for another volatile week as investors respond to developments in the euro zone debt crisis and largely ignore local factors.
After trading with relatively high correlations to volatile international stocks for several weeks, stocks in the Gulf have shown more resilience in the past 10 days, especially in Qatar and Saudi Arabia, where strong government spending can ensure economic growth. In particular, Qatari banks have outperformed; a Reuters poll of analysts in late June predicted Qatar’s economy would expand 16.7 percent in 2011.
Doha Bank shares have gained 13 percent and Commercial Bank of Qatar 10 percent since Aug. 1, compared to a 0.8 percent drop by Qatar’s benchmark index over the same period.
"The sector is relatively insulated from international events, thanks to its strong fundamentals, of course, and high real growth expectations," said Sleiman Aboulhosn, assistant fund manager at Al Masah Capital.
But he said, "The rally is starting to weaken in momentum and some profit-taking is taking place, so we see limited upside from these levels going forward, unless a general pick-up in the Qatari market materializes."
Volumes
As low trading volumes suggest, long-term investors have largely been refraining from putting new money into Gulf markets until the global economic picture is clearer.
"In the very short term, investors will not trade on fundamentals or earnings results because there is no clarity," said Ibrahim Masood, senior investment officer at Mashreq bank.
"Europe’s debt problem is not something that’s going to play out over a year, but over the next few months. Until that clears out, even fundamental investors are dealing with an uncertain situation and ideas can’t be put to work. There are variables that need to fall into place first."
Kuwait’s stock market rose in higher volumes this week, and its main index has gained 6 percent since late August, when it hit a seven-year low in response to disappointment over the lack of progress in implementing Kuwait’s $110 billion, four-year development plan, partly due to tensions between the government and parliament. Uncertainty over the Capital Markets Authority’s new rules for investment firms also hurt sentiment.
But traders mostly cited low valuations for the recent rally, rather than any improvement in the local or global economic outlook.
Saudi petchems and Greece
Saudi Arabia’s petrochemical stocks, one of the largest sectors in the region, could suffer if Greece defaults on its debt, since the financial turmoil could weaken global demand for oil and push down crude oil prices. Local banks could also suffer in line with financials around the world.
"The Saudi market is heavily exposed to movement in global markets. A fall in global stocks would likely be accompanied by a drop in oil prices, which would have an impact on Saudi," said Paul Gamble, head of research at Jadwa Investment.
Investors may therefore stick with domestically driven stocks which are on their way towards strong third-quarter earnings, as the kingdom’s economy benefits from a $93 billion government spending plan announced in March.
"I would say go for companies that have any links to construction and government spending — these should be less thrown around by the external factors that affect our market. Safer bets are cement, construction and industrial investment stocks," Gamble added.
If Greece defaults, bank lending in the Gulf could shrink as institutions become more risk-averse, he said. Currently, lending is at a two-year high in Saudia Arabia.
Turkish visit may support Egypt
Egypt’s market may remain soft next week as investors worry about political stability after the revival of pro-democracy protests and the attack by demonstrators on the Israeli embassy in Cairo. But any positive news from a visit by Turkish Prime Minister Tayyip Erdogan could help the market.
"If no further violence takes place politically over the weekend, and if we hear some good news about Erdogan’s visit in terms of some kind of strategic agreement, then that can move the market," said Hesham Metwalli, trader at Arab Finance Brokerage.
Erdogan, who is on a tour of Arab states to boost his country’s influence in the region, has said he wants to build a strategic partnership with Egypt and enhance economic ties.
Egypt and Turkey said they will increase bilateral investments to $10 billion over the next four years. "We can assure that over the next two years, investments [with] Egypt will increase to $5 billion, reaching $10 billion in four years," said Erdogan.
Erdogan also said he wants to see Egypt involved in the European Union’s Nabucco pipeline project, Reuters reported.
Turkish Energy Minister Taner Yildiz said Turkey may carry out gas exploration in the Mediterranean with Egypt and that it was considering importing gas from the north African country.
With the Egyptian market very near its early August low, traders said there would be room for a rebound if European and US markets recovered next week.
"If they pick up next week, then maybe the market here will pick up a bit," said Ahmed Mohamed, trader at Cairo Capital Securities. –Additional reporting by Maha Dahan
