INTERNATIONAL. After declining nearly 55% in 2008, the MSCI Arabian Markets Index ended January with a further 10% loss. As the pressure in global equity markets continues to play a lead role in moulding investor sentiment in the region, the relatively large weighting of the financial and real estate sectors in MENA indexes has further compounded concerns for regional investors.

These figures are shown in the latest Middle East Market Overview for January 2009 by regional investment bank Rasmala Investments.

Adding to the December news that Global Investment House was in default, S&P and Moody’s downgraded the credit ratings of several Bahrain-based banks. In the current global environment, this recent news has placed a spotlight on the banking sector throughout the region.

The UAE markets lost 10% in January as signs continue to show deteriorating fundamentals in the real estate sector, while concerns over credit quality (both consumer- and real estate-related) worried investors.

On the Dubai Financial Market (DFM), the real estate sector dominated losses, with stocks such as Emaar and Union Properties losing between 10% and 15% of their value respectively. Unlike other markets in the region, the banking sector in Dubai supported the market, with the shares of Dubai Islamic Bank and Emirates NBD ending the month with gains of between 6% and 8% respectively.

The Dubai government has announced its 2009 budget, with an 11% increase in government spending to AED135 billion.

Among local markets, Qatar was the worst performer for the month with losses of 23% in January. Renewed banking sector concerns throughout the region, combined with the sector’s 51% weighting in the Qatar index, were the main reasons for the underperformance.

In terms of valuation, earnings multiples have come more in line with the rest of the region at eight times 2008 earnings, improving the long-term attractiveness of the market.

After 7% gains in December, the Egyptian stock market ended the first month of 2009 down 15.7%, making it the second worst-performing market in the region. Losses were spread across the market, with EFG-Hermes and Commercial International Bank declining 15% and 10%, respectively.

The pressure on foreign reserves should continue as the government expects exports could drop between 10% and 20% in 2009. Further, the geopolitical situation and the continuation of a ceasefire on the Gaza borders will play an important role in the investment climate and investor confidence in the coming months.

Saudi Arabia was the top-performing large market in the region. The Saudi Arabian market had gained 11% by mid-January, only to give back most of the gains as poor company earnings dampened sentiment.

The Saudi market ended the month with a minimal gain of 0.12%. The market was very volatile during the month as equity prices were heavily affected by the preliminary reporting of 2008 results. SABIC, which reported a 95% year-on-year decline in earnings, ended the month with a 13% loss. The telecom and banking sectors also put more pressure on the market, with Saudi Telecom and SAMBA ending the month with losses of 4% and 18%, respectively.

The Kuwait Stock Exchange ended the first month of the year with a 13% loss. The losses were led by investment companies such as Global Investment House and Investment Dar, both of which lost nearly 55% of their value. National bank of Kuwait, the leading bank, lost 8% of its value over the month.

Kuwaiti stocks remain at attractive levels. However, lingering concerns over the banking sector and the ongoing debate over a government-led bailout will continue to weigh on the market. Thus far, the government has denied a KWD5 billion (US$16.8billion) proposed bailout, but has said that it is in talks with the central bank to implement a comprehensive bailout plan to boost the economy.

Oman, the smallest GCC market ended this month with a loss of 11.5%. Losses were spread across the market, with the largest coming from the industrial sector where Al Jazeera Steel and Oman Cables lost 54% and 43% of their value, respectively. Bank Muscat, the leading bank in Oman, declined by approximately 15%.

The Omani government has announced its 2009 budget, with an 11% increase in spending to OMR6.42 billion (US$16.70 billion). However, the government has announced that it expects real GDP to fall by 1% in 2009, mainly as a result of lower oil prices.

The Bahrain market declined 8.27% in January. Bahrain was heavily impacted by the performance of the banking sector. Ahli United Bank, Al Shamil Bank and Gulf Finance House all experienced double-digit declines, of 28%, 18% and 13%, respectively.

The banking sector was the focus of several downgrades from S&P and Moody’s. Also, the relatively less attractive valuations and poor liquidity of the Bahrain market remain a barrier for investing and attracting local and international investors.

Looking forward, intermediate-term volatility should persist as investors digest earnings reports. However, as the market assesses the full impact of the global economic environment on regional companies, we can expect to see some support for equity markets in the second quarter.

MIDDLE EAST BUSINESS COMMENT & ANALYSIS

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