Middle East market report- August 2006 - Rasmala Investment

The ceasefire announced on August 14th was very well received by these markets however and Arab equity markets ended the month with positive returns.

The largest market, Saudi Arabia, was up 2.4% during the month of August. This rally comes on the back of the large losses of July as the improving situation in Lebanon and the pick up in volumes brought investors back to the market. This market remains very much a speculators market as price and trading volume gains were led by speculative agricultural stocks. Liquidity remains very abundant as evidenced by the close to 14% growth in bank deposits at the end of the second quarter of this year compared to the same period last year and persistently high oil prices and the pause in interest rate increases in the U.S will ensure that this will remain the case for the foreseeable future. The IPO schedule continues to be heavy and most IPO's continue to be over-subscribed as market participants see quicker profit making opportunities in the primary market. Emaar Economic City's IPO was oversubscribed by 2.8 times, as 10 million Saudis subscribed for SAR 7.18 billion worth of shares. In addition, Saudi International Petrochemical Company (Sipchem) will float 30 percent of its 150 million shares as part of the Initial Public Offering on Sept. 9 and a Saudi Riyal 10 billion IPO for Saudi Development Bank is expected in November. The appetite for IPO's will continue and most of the new issues are expected to be oversubscribed which will continue to exert pressure on the secondary market. The Saudi Capital Market Authority has been taking quiet steps to introduce further transparency to the market with regards to corporate governance and disclosures and this has gone some way in adding some stability to the market which remains very speculator driven.

The Egyptian market continues to make good progress and build on its spectacular performance in July. Market leader EFG-Hermes reported a whopping 252% increase in profits for the first half of 2006 compared to the same period in 2005 while Orascom Construction reported a 53% increase in profits during the first half of the year. The fundamentals for the Egyptian economy remain positive as revenues from oil exports, workers remittances and increased volumes of traffic through the Suez Canal continue to support the country's balance of payments and foreign current reserves. Egypt announced plans to boost industrial investments to 230 billion Egyptian pounds ($39.76 billion) from EGP16 billion and has set up a strategic plan until 2025 to increase industrial growth to 9% from 5% further underlining the growth potential of the Egyptian economy. At approximately 15 times earnings, the market is not overly expensive and further gains can be expected.

Positive news coming from some UAE companies and the calming down of the situation in Lebanon led to a very strong improvement in prices and trading volumes on the two U.A.E exchanges. Trading volumes and gains were very much concentrated in market leader Emaar which represented some 70% of total trading volumes on some days. This greater investor interest and an attractive price is likely to drive it's price higher in the coming months as investor sentiment improves. The Abu Dhabi market lagged the Dubai market in terms of trading volumes and price appreciation as investors favoured stocks such as Emmar and Amlak over Abu Dhabi listed stocks. The cement sector also performed well as news of the ceasefire in Lebanon lead to cement companies such as Gulf Cement, Union Cement and National Cement showing gains for the month as investors are anticipating a rising demand for the commodity when the rebuilding of the war-torn country begins. An analysis of first half 2006 corporate profit releases shows that profits on the whole grew by a very meager 3% over the same period last year. A closer look at the results however, shows that leading corporate with good stock market liquidity, good core earnings and sizable market capitalization had profit growth of around 37%. As a case in point, the insurance sector, which heavily relies on the stock market, saw an 82% decrease in profits year on year which emphasis the importance of focusing on fundamentally sound companies with sustainable core earnings.

Qatari stocks were down 2.2% during the month of August as profit taking in the last few days of the month erased earlier gains. Rayan Bank and Gulf Cement remained the most traded stocks, followed by Nakilat, but trading volumes remain very volatile and the market remains at a relatively early stage of development in terms of depth and investor sophistication. First half corporate profit releases indicate over 32% growth year on year and importantly, this growth seems to be coming from core operations which is a good sign. Current valuations of around 16 - 18 times earnings overall make this market reasonably well valued but some companies continue to trade at unjustifiable multiples and should be avoided.

The Kuwaiti market recovered well after having reached a year to date low and is up 2.6% as banking and investment sector stocks gave support to the market. First half corporate profit releases were generally negative however, which is leading to trading volumes remaining weak, frequent bouts of profit taking thus preventing the market from making sustainable gains despite its attractive valuations and positive fundamentals. Corporate profits in the real estate and investment sectors are being negatively affected by the downturn in the capital markets while the banking and service sectors showed profit growth. Current valuations of the Kuwaiti market at below 10 times earnings seem to have discounted this slow down in corporate profit growth and we do not expect the market to suffer large falls from current levels. In corporate news, MTC has signed an agreement with 39 international banks for a USD 4billion credit facility, considered the largest loan facility in the Middle East, to finance its aggressive growth plans. Public Warehousing Co shares have gained 20% in the past two months cementing its position as a market leader.

The Omani market gained 7.7% with trading volumes increasing by over 40% as local and foreign investors seemed to suddenly realize that this market is one of the cheapest in the region. Banking and insurance companies continue to attract most of the activity in the market. The newly formed Bank Sohar is offering 40% of its paid up capital of RO 50 million in an IPO scheduled for November of this year. Additionally, Oman Cement Co. profit was 9.75 million Omani riyal ($25.33 million) in the first half, up 26% from OMR7.73 million. The Omani market remains one of the most attractively valued regional markets but a lack of depth and liquidity has often prevented it from realizing its full potential. Its defensive qualities have nevertheless allowed it to avoid the earlier huge losses of some of its more volatile regional peers and it remains a reasonable market for investors.

The Jordanian market was also in positive over the month and a marked improvement in trading volumes has been noticed. Market heavy weight Arab Bank released its financial results for the first half of 2006 which showed a 31% increase compared to the same period of last year and it announced plans to list its shares on the United Arab Emirates (UAE) stock markets of Dubai and Abu Dhabi which lead to further investor interest. It would seem that solid and growing core earnings in the all important banking sector, on the back of the vibrant construction, tourism and consumption sectors of the economy have compensated for decreased income from investments and, along with the end of the Lebanese crisis, greatly boosted sentiment in the market. Corporate results elsewhere in the market were less positive however as Jordan investment Trust announced an 84% drop in earnings and Middle East Complex announced a 70% drop. In other corporate news, Jordan Cement Factories Co. said that it is implementing a 20 million Jordanian dinars ($28.2 million) investment to increase production capacity 31%, to 5.5 million tons by 2008 to alleviate some of the recently observed shortages in the local market and hopefully release some capacity for exports. The Jordanian market remains vulnerable to regional political developments but seems to have weathered the storms reasonably well.

In conclusion, we expect that most of the regional equity market correction is behind us as fundamentals remain very supportive. The recovery will not be uniform however, and a focus on earnings quality and valuations across markets and single stocks is strongly recommended.