Morgan Stanley positive on Middle East equities

Since advising investors to reduce their exposure to the region in October 2008, the region has underperformed other emerging markets and Morgan Stanley's latest report 'MSCI Arabian Markets: Economically resilient and valuations appealing again-start increasing exposure,' states that the timing is now right to begin increasing exposure in regional equity markets, highlighting Saudi Arabia as a particularly attractive market for investors along with Qatar and Egypt.

In the report, Michael Wang, a Global Emerging Market Strategist at Morgan Stanley, says:

"Saudi Arabia is in one of the strongest positions to weather the global crisis due to the fact it possesses one of the largest pools of FX savings and accumulated fiscal surpluses in the world, a sound banking system and minimal real estate exposure. The prospect for further liberalization of equity markets in the country to foreign investors provides an additional incentive to increase positions."

Mr. Wang also believes the Middle East region will be economically resilient, "Despite a sharp cyclical contraction in GDP growth this year due to falling oil revenues, we think the region will be more resilient to the global downturn due to favourable underlying domestic demand trends, strong fiscal stabilizers, monetary easing in the short term and low external debt relative to FX reserves."

"The key difference with the period a year ago has been the fall in inflation across the region as local food and energy prices have moderated. This has allowed regional central banks greater flexibility in following the Federal Reserve in loosening monetary policy without exacerbating domestic balances. Also, the region's adherence to dollar pegs, a stance widely criticized a year ago, has been proven correct and is now actually one of the key anchors for the region," added Mr. Wang.

Despite these positive views, Mr. Wang also offered a warning against investors adopting too aggressive a position.

"Several headwinds in the short term prevent us from recommending a more aggressive position. Regional banks' exposure to falling property prices is a concern, as is the reliance in some banking systems on wholesale funding. Another potential worry is the exodus of foreign capital from the region in late 2008 which has been a key source of vulnerability," Mr. Wang said.

Nevertheless, Morgan Stanley highlights the MENA region as one of the more attractive investment opportunities in emerging markets currently as valuations are attractive relative to the region's structurally high profitability, "Our preferred stocks in these countries would be Telecommunication companies such as Telecom Egypt or Qatar Telecom. Also, Utilities companies such as Qatar Electric and Water are interesting prospectsm," Mr Wang added.