Middle East investors upbeat on 2011

Gulf markets have grappled with debts, regulatory worries and stalled IPOs in the past two years, lagging emerging market peers, but investors see better times ahead in 2011.

The bullish tone is more evident in a year seen globally to be better for riskier assets such as equities as the pace of the global economic recovery speeds up and ample liquidity drives investment.

A Reuters poll of 55 leading investment houses in the United States, Europe ex UK, Japan and Britain showed equity holdings among investors at a 10-month high in December.

Historically, markets in the region have performed well when risk appetite among investors improves globally.

"Investors are very optimistic heading into 2011," said Fadi Al Said, portfolio manager for ING Investment's $95 million Middle East North Africa (MENA) fund in Dubai.

The region has been largely bypassed by a two-year rally in emerging markets where indices in Brazil, India and China hit all-time highs and investors scrambled to build positÿions.

After significantly outperforming in 2009, the MSCI Emerging Markets Index topped Culf Arab markets again in 2010 with a 16.4 per cent gain versus the S&P GCC index which rose about 13 per cent.

"The region (as a whole) has definitely lagged emerging markets, however, some markets outperformed, like Qatar and Morocco," said Nadi Bargouti, head of asset management at Dubai-based investment bank Shuaa Capital.

Valuations and strong earnings will classify the region as an "attractive yield play", analysts at Kuwait Financial Centre (Markaz) said in a recent research note.

"We are entering 2011 with a lot of stability. Earnings growth is going to be good and should provide a fillip to markets," said MR Raghu, senior vice-president for research at Markaz.

Waning concerns, rising hopes

Key factors that could boost the region this year include the possible inclusion of Qatar and UAE indices in MSCI's Emerging Markets Index and the possibility that Saudi Arabia might allow direct access to foreign investors.

Currently none of the Gulf countries are part of the emerging markets benchmark and inclusion would force passive asset managers tracking such indices to allocate money to the region.

"When the indices upgrade countries to emerging markets status, it is likely to have a very positive impact. Qatar and UAE are at the top of the list," Slim Feriani, chief executive of London-based investment firm Advance Emerging Capital said in an interview.

"I am not sure Qatar can even absorb the amount of money which will be pumped into their markets."

Some issues which have plagued markets in the region may also begin to slowly fade away in 2011.

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