MENAF - 21/9/2006

The UAE stock market along with other GCC markets are set for a strong come back from the fourth quarter of this year, said Haissam Arabi, Managing Director of Shuaa Asset Management and fund manager, yesterday.


"The GCC markets which went through a severe correction in the first quarter witnessed gradual consolidation and selective stock picking in the second quarter. Now we are witnessing a slow repositioning of the market and the real recovery is expected to begin from the fourth quarter and will run into the first quarter of 2007," Arabi said.

In the short to medium term, he expects the market blue chips to remain the main focus. The already established stocks are seen as pillars of confidence in each of the markets they represent. However, as the recovery picks up pace he expects the new listings to do well, but based on the strength of their corporate fundamentals.

Comparing the estimated price to earnings ratios of the regional markets, Arabi said the P/Es of Saudi Arabia and Qatar are relatively high at 20.9 and 16.9 they could face short term downward pressure. In UAE and other GCC countries the P/Es are low and are expected to recover in the fourth quarter. While the UAE has a current market P/E of 14.4, Kuwait and Oman have 11 each and Bahrain 8.9, making it the cheapest market in the GCC.

Analysing the long term prospects of the market, he said high oil prices are here to stay and the Arab markets are the next Asian tigers in the making. With oil prices averaging at $70 per barrel, GCC oil revenues are expected to exceed $300 billion in 2006 while the combined current account surplus according to a Merrill Lynch estimate will be $585 billion ahead of China at $521 billion and Japan at $437 billion.

"We are still in the middle of a big boom with very strong macro economic fundamentals. The budget surpluses of the region are expected to exceed $120 billion and government spending continues to rise. Mega infrastructure projects worth $1 trillion (source: Merrill Lynch) is underway against the combined infrastructure spending of $750 billion by China, India and Indonesia, South Africa, Brazil and Mexico," he said.

Shuaa Capital expects the corporate earnings to grow 15 per cent and 20 per cent in 2006 and 2007, respectively. While the corporate and market reforms are on sound footing, Arabi said many regional economies are on their way to become Asian economic heavyweights.

"While the huge size of infrastructure spending gives strong macro foundation (about 20 per cent spending in global emerging markets) for a market boom, Gulf assets will increasingly be considered as avenues for diversification because of their relatively low correlation to many leading global markets."

While the Gulf markets have a 0.24 correlation to with S&P 500, it is 0.90 with Dow Jones Industrial Average and 0.19 with FTSE 100 (source: Bloomberg).

Commenting on the irrational growth in 2005, Arabi said, a lot had to do with the phenomenal growth in money supply (M3) in the region. "Clearly the GCC economies showed signs of overheating with the total money supply increasing 17 per cent in one year with Qatar and UAE topping the increase with 38 per cent and 29 per cent growth in M3, respectively." The liquidity flow into the secondary market has been rationalised since the market correction and lot has been absorbed into the infrastructure.