Middle East research poll 2008: Boom attracts big research players


Rupert Wright
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Regional buoyancy and declining opportunities elsewhere are pulling banks into the Gulf region, bringing with them research capability. Local firms still lead Euromoney’s poll but foreign rivals are coming up fast. Rupert Wright reports.

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The fact that much of the emerging market equity action in the next couple of years is likely to be in the Middle East has not escaped the attention of the world’s biggest banks, which are switching resources to the region partly to make up for the decline of deals in western markets thanks to the credit crunch. Swiss bank UBS will open an equity research office in Dubai at the end of August to cover stocks in the Gulf region as part of an expansion in the Middle East. Stephen Andrews, a European banks analyst at UBS in London, will move to Dubai to head Middle East research and will be responsible for expanding the research team in the region.

"The decision to relocate some of our best analysts globally to Dubai demonstrates the importance of the region to UBS," Nick Pink, head of European equity research, said in a statement. Other bulge-bracket banks, such as Morgan Stanley and Lehman Brothers, have also boosted their teams in the region in recent months. Credit Suisse has appointed Hans Zayed as a director and head of the equity research product in the Middle East. He joins the bank from Merrill Lynch.

"Credit Suisse regards the Middle East as a key growth market and our expanded equities platform reflects our long-term commitment to our clients in the region," says Bassam Yammine, managing director and co-CEO of Credit Suisse in the Middle East. Bankers and analysts are eager to go there. As one banker puts it: "It is better than sitting around in Canary Wharf worrying about losing your job and watching the value of your house get lower every day."

Morgan Stanley is already ahead of the pack. It is focusing on providing in-depth research and is taking great pains to make sure they produce quality rather than quantity. "There is a risk that quality is sacrificed for speed," says Rupert Jones, head of research, Europe Middle East and Africa, at Morgan Stanley. "We want to provide the best research available, while linking into London or New York when necessary. For example, we recently flew out our top infrastructure analyst from London, who linked up with our local analyst to collaborate on our initiation on Dubai Ports."

More than 110 initial public offerings are scheduled for the second half of this year, according to Zawya IPO Monitor, with 55 in Saudi Arabia, more than 30 in the United Arab Emirates and the rest in Bahrain, Qatar, Kuwait and Oman. Most of the deals are coming from family-owned enterprises that are looking for funds to expand overseas.

"We are seeing that more and more analysts are no longer worried to express a negative investment view. This makes sense. You cannot have a positive view on all the companies you cover; you are not doing your clients or investors a favour"
Walid Shihabi, Shuaa Capital

Walid Shihabi, Shuaa Capital
For the time being, the bulk of the research will be carried out by regional players such as Global Investment House, Shuaa Capital and EFG-Hermes. It is no surprise that they emerged at the top of our polls, in most instances sharing the first three categories. But there is room for additional players: the width and depth of coverage is low, with only 60% of companies in the United Arab Emirates, Saudi Arabia and Qatar being covered. Elsewhere, the figure is much lower. Only 21 companies in the region have coverage from at least four brokers – this from a total of 858 listed companies.

"We welcome the competition from international research houses as we feel it will ultimately help investors and encourage the markets to be more mature," says Faisal Hasan, head of research at Global Investment House. "At the moment, most stocks are covered by two or three players. We would like to see companies in the region covered by eight to nine research houses. There is room for growth, it will encourage institutional investors, and increase transparency and corporate governance."

There is no better way to draw attention to a firm’s presence in a market than by producing excellent research. Not only does this tap into liquidity; it can also provide a healthy deal flow. Until recently, this is one of the things that has been lacking in the region. Coverage is not up to the level that is expected in emerging markets elsewhere, with the lack of critical mass making it difficult to establish any consensus. EFG Hermes, for example, actively covers 75 stocks, making sure to issue, at the minimum, regular quarterly updates as well as regular in-depth update notes. "The number of stocks we cover will rise significantly by year end," says Eiji Aono, head of research at EFG-Hermes.

More information

However, as global investors begin to pour more money into the Middle East they are demanding an increasing amount of company information. In 2008, the region has already seen some of the largest equity issues in emerging markets, with Saudi Arabia probably the single-largest market, with deals from Alinma Bank; PetroRabigh, an oil company; and Ma’aden, a mining company. In 2009 there is the prospect that a number of Gulf stock markets will join the MSCI Index, which will bring the markets to the attention of a lot more institutions.

Equity research in the Middle East has not only been slow to respond to the demand but also uncertain about the degree of advice it can give to clients. For example, analysts have been reluctant to issue sell warnings, although an informal code has resulted in most people understanding that a hold recommendation implies that you should dump the stock. For Walid Shihabi, director of research at Shuaa Capital, this is an important step forward because it shows objectivity.

"The reception of a negative investment view is not always gracious, and domestic investors don’t like it very much. But such recommendations are the beginning of a mature market," he says. "We are seeing that more and more analysts are no longer worried to express a negative investment view. This makes sense. You cannot have a positive view on all the companies you cover; you are not doing your clients or investors a favour."

When EFG-Hermes issued a sell note on Zain Saudi in June, the analysts were heavily criticized by the company as well as by the local press and investor community. "Many of the markets are still immature in terms of their appreciation for fundamental research and their understanding of its purpose," says Aono of EFG-Hermes. "Some local investors and companies in the region are only now beginning to realize that investment research is not issued just to drive a stock higher but to provide a balanced view as to the potential for the company and, most importantly, for the stock." Since the note on Zain Saudi was issued, its share price has fallen by 17%.

However, it is hard to benefit from such an approach. Short selling in Middle Eastern markets is either impossible from a structural point of view – or just downright illegal. Is this likely to change? Shihabi thinks that there is the possibility of the introduction of derivatives but it will depend on a fresh approach from the regulators. "From a regulatory perspective, Saudi Arabia is probably the most developed," he says. "There is still quite a bit to be done in the UAE, Egypt has stagnated, while Kuwait has no independent regulator at all."

Attractive valuations

Hasan at Global Investment House says that while his buy recommendations outweigh his sell recommendations, this is as much a reflection on the perceived valuation of the company. "The valuations are pretty attractive right now," he says. "Some of the sectors look cheap, while there is earning growth of up to 20% to 25% per year. Obviously not everything is a buy but much of the banking sector looks attractive, particularly the Islamic services sector and some telecoms. On a macro level, both Kuwait and Oman look good."

Faisal Hasan, Global Investment House

"At the moment, most stocks are covered by two or three players. We would like to see companies in the region covered by eight to nine research houses"
Faisal Hasan, Global Investment House

New funds are launching every day, aware that growth is most likely to come from the Gulf over the next 12 months. According to data from Emerging Portfolio Fund Research Global, there have been net inflows of $1.3 billion into Middle East and North Africa equity funds. This contrasts sharply with a figure of just $51 million last year.

"Also, with the coming of international institutional investors, we will see more demand for equity research as they will be needing the research reports to help them make investment decisions," says Hasan. "This will also spur the listed companies in the region to welcome equity research on their stocks. We are getting towards the situation where more companies organize analyst meetings, compared with only a few today to discuss their business strategies and future growth."

It stands to reason that the scale and depth of research coverage is correlated to the level of foreign institutional interest and participation in the market. However, EFG-Hermes’s Aono warns that there is a danger in following the market, as opposed to being ahead of it. "We all know that everybody is focused on energy stocks at the moment," he says. "Oil and gas stocks are the story now and will be for some time to come. But the key is to be ahead of the curve, looking at stocks that will interest people in six months’ time and beyond. An example is media stocks. There are not many that are publicly traded – most of them are in private hands – but we think that as the economy in the region grows, there will be considerable growth in this area and we think our clients will be very interested."