Putting out green shoots

Equity markets in the Middle East are growing up. Although the crisis in Asia, falling oil prices and Russia's economic problems have made investors skittish recently, foreign investors are taking a growing interest in markets that have become significantly broader and deeper in recent years. Most of the region's exchanges have enjoyed significant growth in market capitalization since 1995. Locals continue to account for most investment on these markets but the numbers of foreigners are growing substantially. Local brokers are confident that when international investors overcome their nervousness about emerging markets they will begin to take a significant interest in the stock markets of the Middle East.

There are 11 stock exchanges in the Middle East including Israel. Egypt has two and there are others in Saudi Arabia, Lebanon, Kuwait, Jordan, Oman, Bahrain and Qatar. The biggest listed companies, by market capitalization and turnover, continue to be in banking, chemicals and construction. Egypt's Romania Bank, Israel's Bank Hapoalim, and Arab Bank from Jordan are among the biggest in the banking sector and other prominent companies include Jordan's Arab Potash, Jordan Cement Factories and Egypt's Suez Cement. Construction is likely to remain important. The demand for cement is expected to grow by about 5% in the next few years to supply local housing projects and an increase in international exports. This, according to Intercapital Securities in Egypt, is because cement factories are disappearing from European countries concerned about the environment.

Stock exchanges dominated by these two sectors can hardly be described as diverse. Even so, Sherif Rafaat, chairman of the Cairo and Alexandria Stock Exchanges, says that the Egyptian exchanges are working to make themselves more attractive to foreign investors. "Readjustments are being made to the exchange to make it more international. Those investors look for large issues, liquidity and depth. In the last three months we have changed our method of syndication and encouraged underwriting."

Ronit Harel, managing director of the Tel Aviv Stock Exchange, believes that foreign money is a significant growth factor for the Israeli market. "Foreign investors are encouraged by our new trading system," he claims. The Tel Aviv Continuous Trading System, which was introduced last year, has improved transparency and increased volume on the market. Since the beginning of this year all the TA-25 shares (the top 25 listed companies) have been traded within system.

The Tel Aviv stock market has a rather different composition from those in neighbouring countries. Many stocks are in growth industries such as electronics, communications, biomedical, bioagricultural and software. Pharmaceuticals company Teva is the second-largest company on the index, with a market capitalization of $2.95 billion and was the third most actively traded share last year at a trading value of $571 million.

But the composition of Arab stock markets is changing gradually. In Egypt, the housing and chemicals sectors have some attractive companies. Mena Tourism and Real Estate Development has a market capitalization of E£111.6 million ($33 million) and since its establishment in 1987 has increased its capital several times. Egyptian Financial and Industrial Company (Efic) is another well-liked stock. It is the primary producer of phosphate-based fertilizer in Egypt and is expected to benefit from a growth in demand for its product from the country's farmers.

Jordan's pharmaceutical industry had good profits last year because of the Iraqi oil for food and medicine agreement by the UN. This year the industry increased about 10% and Arab Pharmaceutical and Daraldawa were among the leading performers on the Amman stock exchange.

Mobile growth

Telecoms is a sector attracting growing interest throughout the region. This is especially linked to the growing popularity of mobile phones which creates strong growth prospects for the industry. Egypt's Mobinile is one of the most successful in the industry. In one week in August it share price jumped from E£10 to E£29. Why is it so popular? "There are only 100,000 lines so far and in a country of 64 million you could easily have 300 or 400 million lines," says Aly El-Tahry, managing director of investment banking at EFG Hermes in Egypt. "There is room for huge growth." Other successful companies include Bahrain Telecom Company.

Noora Jamsheer, financial analyst at TAIB Securities in Bahrain explains why investors are excited about the industry: "Telecoms shares are popular because people are using mobiles more and more. There are international revenues and mobile revenues. The penetration rate in Egypt is so low if you factor in the growth of the population. Mobile sets are becoming cheaper, and are so important these days. So with the penetration rate, the growth of the population, the psychology of the Middle East markets and the fact that people love to keep in touch ­ it is becoming a necessity rather than a luxury."

A foreign influx

With more interesting and diversified stocks to invest in, foreign investors are coming to the Middle East in greater numbers. In Egypt, half of trading is foreign, compared with 34% the year before. Half of those investors are now buyers rather than sellers. On the Amman Financial Market 42% of the investors are non-Jordanian, 4% of them non-Arab where three years ago there were none.

Most individual investors are local, but a growing number of institutional investors are from outside the region. On Egypt's two stock exchanges foreign investment accounted for one-third of total trading in 1997. The Tel Aviv stock market has experienced much foreign participation for the past two years. Foreign holdings now account for approximately 12% of the value of shares listed in Israel.

But there have been setbacks to the development of the Middle East stock markets. Egypt's privatization process has been somewhat soured by the launch of a number of issues that were considered overpriced. Egypt has also been damaged in recent months by an outflow of funds as foreign investors become nervous about losses in other emerging markets. The Kuwait Stock Exchange, which is not open to foreign investors, has been damaged by political and oil worries and the threat of an outbreak of conflict affecting Iraq.