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Skip Navigation LinksHome :: Back Issues :: At last – steps toward a deeper and wider market

September 2000

At last – steps toward a deeper and wider market


Independent market regulation and a more relaxed approach to foreign investment are among new policies setting Arab states on the road to more dynamic markets. Not before time – accession to the World Trade Organization means the doors will have to open to foreign competition.




There are positive signs for the investment community. Senior Arab Figures, such as Bahraini Finance minister Abdullah Saif, are calling for the creation of a 'capital-markets culture' in the region. All the stock exchanges are buying state-of-the-art computerized technology. Saudi Arabia has introduced changes in its investment laws designed to attract more foreign capital and the United Arab Emirates (UAE) is, after years of prevarication, edging toward a formal exchange which will replace the lottery of the over-the-counter market. Even the Palestinian Authority has an exchange and was the fastest growing market in the region last year.
       
Computerized technology has invaded all the region's stock exchanges
Local fund managers are increasingly positive about opportunities, citing the combination of political and economic stability, the relaxation in foreign investment laws, the new-found readiness to privatize state industries, the waiving of taxes and currency stability against the dollar.
According to Maha Al-Ghunaim, managing director of the Kuwait-based investment bank Global Investment House (GIH), "the Gulf Co-operation Council [GCC] equity markets are the last frontier in emerging markets. We believe this area is undergoing a major restructuring.
Foreign investors' laws are currently being approved and implemented in almost all GCC countries."
However, bankers and politicians are well aware that it will take several years to make significant progress. Before the region's exchanges achieve international credibility, they need to shake off their reputation for extreme volatility and insider dealing. They also have to broaden the types of companies quoted on the markets and improve the quality of research provided by local and international brokers.
Some progress has been made on broadening the market - there are now more quoted telecommunications companies as governments privatize and allow more competition in both mobile and land line services. But the markets are still dominated by Financial institutions, property companies and old-economy shares.
There is little sign of any e-commerce stocks, though in recent months that has proved to be a blessing in disguise.
Until these problems have been resolved, Middle East markets will be off the radar screen of most institutional investors.
       
Western investment banks advise putting only 2% of any global fund into Arab markets.
Serious Arab investors are continuing to put most of their money in equity and property investments in Europe and the United States.
Bankers estimate that Gulf nationals, an estimated 190,000 of whom are millionaires, hold $900 billion in assets overseas. In stark contrast, Arab markets have a capitalization of only $185 billion, equivalent to 6.5% of total capitalization of the 38 emerging markets and 0.6% of global capitalization at the end of 1999. Even the largest of these - Saudi Arabia with $61 billion, followed by Egypt with $32 billion and the UAE with $20 billion - are mere scratches on the body of global stock markets.
Another barrier is that only a small proportion of the shares in this already small market can be considered by international investors. According to Henry Azzam, chief economist and managing director of the Beirut-based Middle East Capital Group, governments are still the largest shareholder, holding about 40% of capitalization. "Some 30% of the remaining $110 billion is held by families and strategic investors, seeking control and board representation. They are unlikely to trade their holdings. If you remove those markets that do not allow foreign holdings, only a fraction can be considered by global investors."
A further deterrent to international and serious local investors has been the poor performance of the markets in the last 18 months. A correction was clearly needed after the dramatic growth in the mid-to-late 1990s.
In 1997 alone, Kuwait produced a rise of 40%, Bahrain was up 49%, the UAE climbed by 32% and Oman recorded the best performance in the world by rising 141%.
It was too good to last. The fall in oil prices, combined with the Asian and Russian crashes in 1998 and action by regulators alarmed by the amount of money borrowed for investment in already overheated markets, plunged Arab markets into the red. And even though oil prices have doubled in the last year and Arab markets were virtually unaffected by Nasdaq's problems, the First half of 2000 was also poor.
       
Egypt, in particular, has not matched up to the bullish expectations of many analysts, showing the worst performance among Arab stock markets this year. Even the announcement in July that Egypt would be included in the MSCI index from May 2001 failed to generate much excitement.
In the longer term, however, Cairo&Alexandria Stock Exchange (CASE) chairman Sameh El Torgoman says he believes that the country's inclusion in the index will make "international investors look more closely at the Egyptian market". However, even this prospect did not deter Flemings from recently downgrading Egypt from "neutral to underweight in a portfolio designed to outperform the IFC Investable Europe, Middle East and Africa (EMEA) index".
This change in attitude has come after a year (1999) in which investment bankers somewhat naively were singing the praises of the Egyptian market - it is still the only Arab market to appear in most banks' emerging- markets research documents. The combination of a chronically slow pace of privatization, indecisive foreign exchange policy and widening Fiscal deficits have damaged the country's risk rating and meant a rough time for all but a few shares in the telecommunications sector.
       
In Amman they're determined to separate regulation and market
Morocco is at a two-year low; Lebanon continues to trade Flatly despite the Israeli withdrawal and Jordan's market has been deserted by foreign investors. "The market has had to contend with a Flight of capital to stock markets in the developed world," says Azzam.
Only now are Arab markets showing any sign of bottoming out and, in the absence of more progress on the Middle East peace process and evidence of a return to growth, the recovery is likely to be slow. Azzam says that in the western Mediterranean, Tunisia and Morocco will perform well while the smallest market, the Palestine Stock Exchange, will benefit from interest in its telecommunications stocks. Lebanon and Jordan are expected to have another weak year.
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