Mena exchanges struggled through 2011 as trading dropped on Arab Spring, Euro debt

By Triska Hamid, MEED Business Reporter

Activity had been picking up in early January, before demonstrations spread from Tunisia to Egypt and beyond and the markets quickly began to collapse.

Since December 2010, the Mena stock exchanges have lost about $100bn in market capitalisation, according to Majdi Gharzeddeene, head of investment research at Kuwait's Kipco Asset Management Company (Kamco).

"[This is mainly] due to a lack of investor confidence, flight of capital and bearish market sentiment that pushed trading activities to its lowest level," he says.

As of 17 November 2011, the combined market capitalisation of the Mena bourses was $856bn. The GCC bourses alone have lost $65bn in market capitalisation falling to $714bn.

Regional markets have been directly affected by the European and US debt issues. They were the first to feel the blow of the US sovereign credit rating downgrade by ratings agency Standard & Poor's from AAA to AA+ on 6 August. All of the region's bourses, with the exception of Tunisia, fell as a result.

The worst hit were Egypt, Saudi Arabia and Dubai. The Egypt Exchange fell by 4.1%, Saudi Arabia's Tadawul dropped 4.9% and the Dubai Financial Market slid 2.2%.

Global exposure effects

The downgrade underlined the exposure the region has to global financial markets. "High volatility in the international financial markets, debt strains and a severe confidence crisis in Europe ... have been fuelling volatility and instability in the bourses since the beginning of the year and weighing down on market sentiment," says Gharzeddeene.

The Egyptian Exchange has been the worst-performing bourse in the region. Since the beginning of the year, it has fallen by about 42%, losing $20bn from its market capitalisation. Following the fall of the Mubarak regime, investors started channelling their money into safer investments.

Saudi Arabia's Tadawul, the region's largest bourse, has fallen about 6% since the beginning of the year and has lost $25.5bn in market capitalisation. The benchmark tumbled to its lowest level in the first week of March, hitting 5,323.27 points, due to fears that an uprising would take place in the country. However, a hardline response from the authorities diminished the possibility of a revolution and the Tadawul rebounded.

Elsewhere, the Kuwait Stock Exchange (KSE) has declined 16% since the start of the year and has lost $23bn in market capitalisation. This is partly due to the regional political unrest and the contagion effects of the European debt crisis, but also because of internal problems within the country's capital markets. Kuwait is still in the process of establishing a regulatory body and while it addresses these challenges the bourse is unlikely to grow.

Bahrain's main index has dropped by about 18% since the beginning of the year. The unrest in the country and the king's heavy-handed response to protests shattered Bahrain's image as a safe-haven for foreign investment in the region.

The Iraq Stock Exchange has been the best-performing bourse this year, mainly due to its insular nature and lack of exposure to global markets. It is still in an early development phase, with daily turnover averaging $2-3m. Its market capitalisation is currently $4m, but this is forecast to double once the three telecoms operators have listed on the exchange.

UAE, Qatar look to upgrade to 'emerging market' status

The UAE and Qatar are also seeking an upgrade with the MSCI to emerging market status. A decision was postponed until December to give investors in the UAE the chance to adjust to the new processes in place and to give Qatar time to amend its foreign ownership laws, currently limited to 25%. While many feel the UAE will be upgraded, there is less optimism about Qatar's chances.

"We think it would be positive if it were upgraded, but on balance we think it is unlikely," says David von Simson, chairman of the Qatar Investment Fund. "We suspect the foreign ownership laws will not be relaxed in time for December."

An upgrade to emerging market status would bring further investment into the region and help boost the performance of the two bourses, but it is unlikely to be enough to counter the global economic issues that will continue to affect the region in 2012.

This extract was taken from MEED's Yearbook 2012, to read the full article please visit Meed.com