Falling valuations in Middle East markets failing to attract bargain hunters

By Gérard Al-Fil

The G8 said in its final communiqué after the two-day summit in the G8 summit in Deauville, western France, that "the global recovery is gaining strength and is becoming more self-sustained." On the other hand, economists, such as Nouriel Roubini, nicknamed Dr. Doom, said on the same day end of May, stock markets were "at the tipping point" of a correction as global economic growth starts to slow.

Gary Dugan, CIO Private Banking at bank Emirates NBD agrees: "Much of the global economic data is confirming the slow-down in growth. Global industrial production growth is in the midst of a slowdown from a quarter-on-quarter growth of 9% in February to a pace of just 2% in recent months."

GCC stock markets not offering good rates of return

In the GCC, neither stock markets nor the real estate sector are offering attractive rates of return. As of May 28, only the Saudi Arabian stock exchange Tadawul posted a small year-to-date gain of above 1%. Dr. Muhammed AL-Jasser, governor of the Saudi Arabian Monetary Agency (SAMA) explains why: "Saudi Arabia's economic environment is characterised by attractive low interest rates, a stable background for investment, deficit spending, and a low to debt to GDP ratio of 10%. Tax rates for foreign companies at around 20% on foreign enterprises."

The spending package of $130bn , ordered by HH King Abdullah, has also strengthened trust in the largest GCC market. According to Rajhi Capital in Riyadh, the Saudi petrochemical industry benefits from tougher UN sanctions against Iran, which was forced to decrease exports to India, and this supply gap is filled by the likes of Saudi Arabia's bellwether firm Sabic. Trading at around SR109, Credit Suisse has set a target price at SR120, while Al Rajhi Capital expects Sabic shares to rise to SR130.

NASDAQ Dubai suffers setback

All other GCC exchanges have lost between 3% (Qatar) and 11.5% (Muscat) year-to-date. NASDAQ Dubai also suffered a setback when China Security and Surveillance Technology (CSST) recently decided to de-list its shares from the exchange (CSST remains listed in New York). "Valuations are cheap, and listed company's profitability figures are rising, but investors do not invest heavily," says Dr. Said Al-Shaikh, group chief economist at National Commercial Bank.

The same applies to the Dubai Financial Market (DFM), which has been going through a five-week correction since mid-April. Market bellwether Emaar Properties hasn't generated shareholder value this year, but the share's price-to-book value stands at 0.59, meaning Emaar is regarded by the market as worth less than its real value in relation to assets. Contractors Arabtec Construction and Drake and Scull International also trade below their book values. In the past, such divergences were the best time to accumulate equity positions.

Some hope in shattered market

In the Dubai real estate market, "more and more high net worth individuals start to invest in premium areas such as Arabian Ranches or The Palm Jumeirah," ENBD's Gary Dugan has observed. As an investment, commercial space clearly lies on the bargain table. According to real estate service provider Asteco, "Approximately 15 million square feet of office space was added to the market in 2010, taking total office space in Dubai to 48 million square feet. Occupancy levels vary depending on the development, but on average the vacancy levels were estimated at 38% last year and could rise to 50% if the projected 12 million square feet of commercial space is handed over in 2011."

Maybe the coming quiet period of summer and the Holy month of Ramadan will function as wake-up calls when investors realise the negative rates of returns they achieved during the first of the year.