Mena liquidity fated to make a gradual return

Liquidity in regional markets is a good indication of the magnitude of uncertainty prevalent at any moment in time. Of course, the chief leading indicator, by virtue of financial theory, is the asset price itself. However, in the recent past the regional markets were affected by news from Dubai World. It is too late to risk a comment on that in too much detail as the company is clearly in the final stages of an agreement with its lenders. The news was followed shortly by the economic difficulties of Greece for which it now seeks help from other European countries. Germany and France are now pondering the prospects of a European Monetary Fund to function on the same lines as its inspiration, the International Monetary Fund.

Such is the news from around the world at a time when the US unemployment rate is at 9.7 per cent, the global economy is reeling from its worst recession and the Middle East is reconciling with recession after a few years of fast growth. Mena investors have to position themselves in such a way that they are prepared for ramifications of the global macroeconomic situation and issues native to the region. In such a state of affairs, it is not surprising that liquidity in equity markets has shrunk noticeably. Trading in markets such as the UAE has been sporadic as investors await news from Dubai World and commodity prices add some optimism.

In the UAE, the average daily traded value for the past three years is about $478 million [Dh1.75 billion]. During the first two months of 2010, this average has dropped markedly to $130m, with the Dubai Financial Market accounting for 67 per cent of this. Similarly, the average daily volume in number of shares for the past three years is 581 million in the UAE and it dropped to 247 million shares per day in the first two months of 2010. Lastly, the average number of daily transactions on the UAE markets has dropped from 12,371 to just 5,736 in 2010, a steep drop of 53 per cent.

The most liquid market in the region is Saudi Arabia, where on average the traded value is in the region of $2bn per day. So far in 2010, the average has been a less impressive $756m, a 62 per cent drop from its long-term average. The number of traded shares has also dropped markedly from 229 million per day to just 131 million and lastly the number of transactions has dropped from an average of 198,623 to just 86,400. Saudi banks have had a rough time in the wake of the crisis as non-performing loans spiked, leading to higher provisions. The banking sector is the largest component of the GCC and Mena markets in terms of market capitalisation and number of listed companies. The decline in turnover and volumes started in May 2009 and after a brief recovery, volumes fell again in November-December 2009.

The trend in other, less liquid regional markets is quite similar with volumes dropping sharply from their 2008 highs. Some markets such as Bahrain continue to harbour high liquidity premiums. As an example, it takes Bahrain a quarter to register as many transactions as other markets do in a single day. As long as the macroeconomic situation remains unstable, these figures are unlikely to change severely in the immediate future. The crisis seems to have evolved from an international yet corporate-level challenge to a sovereign quandary. As the world gradually crawls out of this recession, so should liquidity in Mena markets.


- The author is Investment Research Analyst, Asset Management, at The National Investor. The views expressed are his own


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