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GCC Markets Still Attractive

The GCC stock markets remain attractive to investors due to strong economic factors, attractive valuations, stable economies and sound market liquidity, says a report. The fall in stock prices during 2006 shows signs of consolidation more than a start of a long bear phase, according to M R Raghu, head of research, Kuwait Financial Center (Markaz).

Bear markets are generally accompanied by economic recession and banking system weaknesses. Neither of those conditions is forecasted for GCC region in 2007, he says. Among economic sectors, the report assigns positive ratings to banking, telecom and services sectors; neutral rating to industrial sector and negative rating to real estate sector.

The report examined nine important variables like economic factors, valuation attraction, economic liquidity, investor sentiment, etc and assigned scores based on each factor in order to assess the relative attraction of each GCC market.

On a scale of 1-5, Oman top scored at 2.93, followed by Bahrain (2.85) and Kuwait (2.84). Saudi Arabia scored 2.66 while UAE was at the bottom with a score of only 2.18. Accordingly, the report suggests overweight to Kuwait, Oman and Bahrain, neutral weight to Saudi Arabia and underweight to UAE.

2007 may be headed for lower real GDP growth according to international forecasts. Qatar is the only GCC economy that is expected to maintain its scorching pace of growth, according to Raghu.

UAE and Qatar appear vulnerable to inflation threat as inflation is close to double-digit. Strong demand growth coupled with supply bottlenecks lead to inflation turning higher than the average. The supply bottlenecks are expected to continue especially in sectors like construction.

Kuwait and UAE enjoy very high fiscal surpluses relative to other GCC countries. All GCC countries enjoy excellent current account surpluses.

In terms of valuation attractiveness, all GCC countries except Saudi Arabia enjoy attractive valuation in terms of P/E and P/B. GCC valuation is looking attractive compared to emerging markets. Some of the emerging markets look very expensive in terms of P/E like China (31), Czech Republic (26) and India (23). Expected P/E ratio for GCC is estimated at 13. Dividend yields have improved in 2006 after a sharp correction. GCC economies continue to experience strong growth in broad money (liquidity) relative to their long-term trend. The study notes that Saudi Arabia exhibits strong sensitivity to liquidity growth.

After the steep market correction, GCC equity fund managers have started increasing their allocation to Saudi Arabia, though slowly. Corporate profitability growth was lower in 2006 compared to previous years. The slump in earnings is mostly concentrated in mid and small caps more than large caps according to trends available till September 2006. For example, in Kuwait while the overall market reported a drop in earnings of 19 per cent, the top companies recorded a growth of 20 per cent while other companies earnings fell by 71 per cent. Other GCC countries also reported similar pattern.

The framework also measures investor sentiment through response to IPOs. Raghu notes that there are no formal mechanism to measure investor sentiment and hence response to IPOs can be considered as a distant proxy to measuring investor sentiment. Amount raised through IPOs halved during year 2006 compared to year 2005 reflecting weak investor sentiment. While the secondary market recorded huge slump in Saudi Arabia, the market for IPOs and rights continues to be strong indicating strong investor appetite.

GCC economies are experiencing stable and improving political conditions as reflected by international ratings. GCC economies score very well on economic structure risk. Stock market liquidity dropped during year 2006 with Saudi Arabia and Bahrain being exceptions. -(TradeArabia News Service)

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