GCC Stocks Look good for Foreign Investments

Middle Eastern stocks, some of which are bottoming out after large falls, look attractive again and foreigners who position now stand to gain as markets mature and open up more to overseas cash, a senior fund manager said.

The region contains markets like Egypt and Morocco -- star performers last year on the Morgan Stanley index of emerging equities -- and Gulf bourses like Saudi Arabia, many of which are closed to non-residents and ended the year down after large shakeouts.

'Valuations now are no longer extended compared to other emerging markets...from a historical point of view they are the cheapest they have been for a long time.' said Oliver Bell, chief investment manager at Pictet's $7.8 billion Global Emerging markets fund.

'I understand there is a chance they will open up to foreign investment sooner than everyone realises. It's a question of timing -- you could get caught flat-footed if you don't start looking at them now,' Bell added.

He sees little danger of another equity bubble developing, similar to the situation in 2005-2006 when millions of retail investors poured their money into soaring markets only to see their savings evaporate a few months later.

'As the market becomes cheap again it's always the foreign investors who come in first and then as confidence returns, local money comes back in,' Bell said. 'I can't imagine those who were hurt so badly so recently are going to come back...I don't think the market really will run away from us very quickly.'

But high oil prices, the factor that fuelled booming growth and huge current account surpluses, are still a factor and will not fall below $40 a barrel soon, he said.

Non-oil producers like Jordan are also benefiting, due to investments, tourism and expatriate workers' remittances.

'They are investing in their own countries and putting in infrastructure which in the past they did not do. Therefore what you see are the offshoots, you see companies rising in the foreseeable future as a consequence of that,' Bell said, citing banking and infrastructure firms across the region.

The downside is Gulf equity markets are not included in the MSCI index, often required for Western institutional investors. That may change if restrictions on foreign investors are lifted.

And at present a large instutitional investor does not have much opportunity for sector diversification as petchems, banking and telecoms dominate the bourses, Bell acknowledges.

For now he has $500 million invested into his overweights such as Egypt and is conducting due diligence on markets like Jordan and Oman. And until Gulf markets open up, he says he is getting exposure to them via select Egyptian stocks.

He likes Orascom, the Egyptian telecom, financial and tourism conglomerate.

Bell acknowledges risks are high -- reliance on a single commodity and constant geopolitical tensions that last year erupted in an Israel-Hizbullah war, and continue to simmer in Iraq, Iran and Lebanon. Islamic fundamentalist groups also pose a threat, especially in regional giant Saudi Arabia.

But he cites Israel as a case where markets outperformed despite geopolitical risks. Iran and Iraq are problematic but tensions are unlikely to spill over yet, he believes.

'One aspect of investing in these markets is that it's all oil-related money, so if oil does fall below $40, these markets will go with it,' he said. 'But from my point of view it's only when oil goes below $40 that one needs to start worrying.' Reuters