Bahrain shares have room to improve (page 3 of 3)

At the same time, services sector experienced the biggest jump in its turnover rising from 2.64% in 2002 to 4.32% in 2003.

BSE presented a lackluster performance compared to the other GCC markets, appreciating by 28% in 2003 and it remains one of the cheapest markets in the region. The price/earnings multiple of around 17 for the Bahraini stocks is low in comparison with other GCC markets and very low internationally.

The US markets are currently trading at a P/E of 22. Such a low valuation for the Bahraini market simply does not reflect the profit outlook of the corporates in the next few years in Bahrain, which is one of the best managed economy in the region and which has recorded the highest GDP growth rate of 6.2% in 2002 as compared to its GCC counterparts. Thus there is much steam left in the Bahraini equities.

The availability of alternative investments opportunities, notably the real estate and construction sector has held back the Bahraini stock market in 2003. One thing that often happens in an investment boom is that other asset classes such as local equities get overlooked and thus become undervalued. We expect the reverse to happen in 2004.

Despite its unimpressive performance in 2003 as compared to other regional markets, Bahrain equities offer one of the highest dividend yield of around 5%, available in the region.

As the Bahraini Dinar is pegged to the US Dollar, interest rates in Bahrain echo those prevailing in the US. The US interest rates are expected to inch up, although marginally, in the middle of 2004 and the Bahraini rates would also follow suit.

There will be still substantial differentials between short-term deposit rates and dividend yields available in the Bahrain Stock markets that will continue to lure the investors. The market will continue to benefit from the increased liquidity in the system due to the low interest rate scenario.

The current low interest rate scenario and the healthy earnings outlook coupled with the attractive dividend yield point towards further upside potential for the Bahraini stock market.

While the valuations of some of the regional markets have now started to look expensive, some of the blue chip stocks on the BSE continue to trade at a discount to their historical valuation levels.

The medium term outlook for Bahrain does look more optimistic as the country's macro picture remains healthy even though the oil prices in 2004 are expected to fall from their 2003 levels.

We expect the increasing liquidity in the system will find its way into the stock market and the real estate sector, thus further providing a boost to the market. Other factors such as the progressive political and economic liberalisation in the country are clearly encouraging.