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Mena outshines emerging and developed markets

By Karen Remo-Listana



Equity markets in the Middle East and North Africa (Mena) have outperformed other emerging and developed markets, according to a recent equity report.

And although equity markets in the region are not completely invulnerable to the global “margin call” and risk aversion, Mena’s capital markets are expected to maintain their momentum from 2008 up to the mid-term, a report by Merrill Lynch said.

“The Gulf is expected to trade at premium to other emerging markets given healthy macroeconomic growth, low risk premiums and abundant capital and solid current account positions relative to other fast-growing frontier markets,” the report added.

The region, the report said, has just recently recovered from the 2006 crisis where a market capitalisation of $1 trillion (Dh3.67trn), more than the region’s $700 billion GDP, was wiped out.

The recovery, which was “quicker than most post-bubble experiences”, will be sustainable over the medium term driven by an economic boom of unmatched scale.

According to Eckart Woertz, economics programme manager at the Gulf Research Centre, high liquidity and speculative exuberance led to overvaluations of the GCC stock markets in comparison to other emerging markets and subsequent corrections in 2006.

“Until February 2006, the GCC stock market hype had acquired all the characteristics of a mania, ordinary people were ready to give up their jobs to speculate on credit, and valuations were extraordinarily high in comparison to other emerging markets, price/earnings ratios were as high as 50 and price/book ratios as high as 12,” he said, adding the overvaluation of stocks was the obvious reason for the stock market corrections in the GCC in 2006.

“There is no other single and sudden event like an oil price slump or a political crisis one could link to it. The overvaluation has been propelled by super abundant liquidity and irrational exuberance,” said Woertz.

The correction, however, had limited secondary impact on the region’s liquidity, real estate and banking sectors. While valuations collapsed, earnings and the economy continued their growth trajectory.

“On a medium-term view we believe the secular recovery phase is sustainable. The macroeconomic backdrop remains strong with expected GDP growth of 5.7 per cent on average in 2008-2009,” the report said.

The favourable demographic of the region is also helping boost cash-rich investors’ confidence.

The GCC is experiencing strong population and labour force growth and an influx of expatriates.

The World Bank is projecting population growth for the GCC of 2.4 per cent a year between 2005 to 2010 and two per cent during 2010-2020. Qatar and the UAE are witnessing growth rates of six per cent and 4.5 per cent due to expatriate immigration. Moreover, the region’s population is relatively young with 64 per cent aged below 30 years.

This is far more pronounced in Egypt, where almost half the population is below 20 years, with the workforce expected to grow by 600,000 a year.

“Demographics underpin the organic demand for real estate and infrastructure in the long term,” it said.



The growth is buoyed by the GCC governments’ relative prudence on spending. The region is now awash with cash, with the GCC having built up a cumulative surplus of around $730bn over the past five years.

In addition, private wealth assets in the region have been estimated between $1.2- $1.5 trillion, while the GCC’s current account surplus in 2006 alone was a quarter of the US deficit.

Petrodollar spending on infrastructure and diversification programmes is also fuelling growth in non-oil sectors. The Gulf market is handpicked by Merrill Lynch’s strategist Michael Hartnett as his top frontier recommendation on the basis of massive oil surpluses, excess liquidity and attractive valuations.

Hisham El Khazindar, Co-Founder and Managing Director of Citadel Capital agreed, saying investors in the GCC should take advantage of investment opportunities in the emerging markets of Mena region.

El Khazindar said the emergence of a growing number of developing economies within the region such as Egypt, as well as Algeria, Sudan, and Lybia, with favourable market conditions, including economic liberalisation, sector privatisation and deregulation, make it crucial for GCC investors to expand these frontier markets’ weights in their private equity portfolios.

“Not only is the opportunity there; but for GCC investors, given surplus liquidity competing for opportunities in the GCC, I believe it’s a must for them to put greater emphasis on the emerging private equity opportunities in the wider region,” he added.



Overall, the emerging countries, of which the Mena region is a part of, will take charge in the next two decades. The global centre of economic gravity is already shifting to China, India and other large emerging economies such as the UAE and Qatar and in a few years time, China will emerge as the world’s superpower, says a recent report.

“Our latest projections suggest that China could overtake the United States in around 2025 to become the world’s largest economy and will continue to grow to around 130 per cent of the size of the US by 2050,” says The World in 2050 by PricewaterhouseCoopers.

India could grow to almost 90 per cent of the size of the United States by 2050, the report sent to Emirates Business said.

“Brazil seems likely to overtake Japan by 2050 to move into fourth place, while Russia, Mexico and Indonesia all have the potential to have economies larger than those of Germany or the United Kingdom by the middle of this century,” PwC, the world’s largest firm of accountants, said.

The fastest mover, it said, is Vietnam, with a potential growth rate of almost 10 per cent per annum in real dollar terms, that could push it up to around 70 per cent of the size of the British economy by 2050.

International financial markets have been reacting to the imminent economic reshuffle by reaching out to these markets.

Another report shows larger manufacturing firms are deriving more than 60 per cent of their profit from outside the United States.

This could be seen in the positive as the worldwide survey says this revenue balance will help the industry offset any detrimental effects of an economic slowdown.

“In last year’s predictions report, we discussed how the industry was entering the year with high expectations mitigated by high uncertainty,” said Bob Parker, Vice-President of Research at Manufacturing Insights, an IDC company, which focuses on independent research.

“As we enter 2008, it seems that uncertainty has overtaken expectations as the industry girds against the prospects of a recession.”

According to the annual Worldwide Manufacturing 2008: Top 10 Predictions report, a recession in the United States no longer guarantees worldwide trouble, as many of the largest manufacturing firms in the United States now earn more than half of their revenue and profit from abroad.

The Economist Intelligence Unit (EIU) predicts that worldwide investments will double by 2015 to more than $300trn and quintuple to $700trn by 2025. About 60 per cent of this growth is expected to come from emerging markets.

Investment banks are also setting up shop in previously inaccessible places, for example, the five top US Wall Street firms – Bear Stearns, UBS, Merrill Lynch, Goldman Sachs and Morgan Stanley – have created joint ventures in China.

A set of new names is also expected to come up as leading countries in the next two decades, the report said. Nigeria, while high-risk, has the long-term potential to overtake South Africa to be the largest African economy by 2050, it said, adding that the Philippines, Egypt and Bangladesh have high growth potential but also high-risk levels.

But the rapid growth of emerging economies does not mean the demise of the Organization of Economic Cooperation and Development (OECD) economies, John Hawksworth, head of macroeconomics at PricewaterhouseCoopers, said.
“It should prove to be a boost for them, through growing income from exports and overseas investments, even as the OECD share of world GDP declines.”



While most experts paint a rosy picture for the Mena region – to the extent of saying GCC economies will be insulated from the slowdown in the United States – threats could still slow down growth in the mid term.

Merrill Lynch said the growing execution risks (rising raw material costs and other supply-side ‘bottlenecks’) driven by the frenetic pace of developments could scale down larger real estate projects as well as make static the growth of hydrocarbon output.

“This will lead to slower than expected medium-term growth,” the report said.

The Arab Petroleum Investment Corporation (Apicorp) had also recently sharply revised up its estimates for the required capital in the region because of rising costs.

It said such a rise had pushed up the needed for investments by nearly 24 per cent to $490bn for the period 2008-2012 from $395bn  during 2007-2011.

Apicorp warned that such an increase had started to adversely affect expansion projects in the region.

“Despite higher capital budgets, Mena investments appear to be loosing some momentum. Policy-makers and project sponsors who, until recently, have been boasting ambitious investment plans, have voiced concerns about two critical issues that could seriously impede future development prospects,” it said.

Inflationary pressures are also currently threatening the region’s attractiveness to expatriates, which is premised on a stable macroeconomic environment with no or insignificant taxation.

“Growth will create its own set of problems. The GCC might end up with a large, poor population of foreign workers,” Dr Anas Alhajji, George Patton Chair of Business and Economics at Ohio Northern University, told Emirates Business.

Woertz added: “Amid double digit growth only the salaries of public sector workers and the upper tier of skilled white-collar employees managed to keep up with inflation at best, while much of the workforce actually faced declining real wages and living conditions – hardly an appropriate distribution of wealth.”