Gulf equity markets struggle to regain momentum

Gulf equity markets will struggle to regain momentum in the summer months on revived worries that cooling inflation will develop into deflation.

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Published: Sun 12 Jul 2009, 12:36 AM

Last updated: Thu 2 Apr 2015, 7:35 AM

Most stock markets in the region have had a huge chunk of their gains from the rallies in mid-March eroded with the recent spate of negative indicators from leading economies casting doubts about global recovery this year said CA Cheuvreux, a full-service broker within the Crédit Agricole group and a wholly-owned subsidiary of Calyon.

CA Cheuvreux said both global and regional markets will be focusing on battling deflationary pressures for the remainder of the year. “The rapid shift away from deflationary expectations earlier in the year has been the impetus for this equity rally going back to mid-March. At some point (hyper) inflationary pressures may become the focal point for financial markets, but for the foreseeable future deflationary concerns will dominate.”

In the UAE, the second biggest economy in the Middle East, inflation eased to 1.9 per cent in April compared to 7 per cent in January, although prices for the first four months of the year were 4.9 per cent higher compared to the same period in 2008. Up until the dramatic downturn late last year, inflation levels in the UAE accelerated from 4 per cent in 2005 to 9.3 per cent in 2006, 11.1 per cent in 2007 and 11.5 per cent in 2008. Some economists warned that the downward trend may lead to deflation or negative inflation which in turn, could create problems for governments trying to kick start economic activity. “Deflationary anxiety will remain the principal enemy of equity markets in 2009. It seems that price expectations in the trans-Atlantic economies will go no further at this point. We would expect implied annual inflation in the major debt markets to stabilize in the 1.5-2.0 per cent, below the pre-crisis norm of 2.2-2.7 per cent,” said CA Cheuvreux.

It noted that with rising global inflationary expectations coming to a halt in mid-June, so did the rally in global equities. “Gulf equities will continue to take their cues from global equities until deflationary anxieties are put to rest.” For the remainder of 2009, stocks that have benefited most from the previous rallies, the real estate and petrochemicals in the UAE and Saudi Arabia, may see more reservals.

Also keeping the markets at bay, are regional news flow such as the announcement of Emaar Properties that it will merge with the real estate business of government-run Dubai Holdings, and the exposure of banks to the troubled Saudi companies, Saad and Gosaibi, said CA Cheuvreux.

It said combining four troubled companies into one has its operational benefits but “does nothing to fix the broken Dubai model.”

It added that while nearly 40 per cent of Emaar’s assets are classified as international, only 12.5 per cent of 2008 revenue were derived from its overseas portfolio. Another downside for Emaar is the limited information as to how the new merged entity will be structured.

There has also been little disclosure regarding regional banking exposure to the Saad and Gosaibi groups, and “until more is known, this could drag on markets.”

“While most of the lending exposure is associated with global institutions, the UAE may take the biggest hit from regional banks.”

CA Cheuvreux said it is keeping its “overweight” rating on banks as it does not expect non-performing loans to be a major problem until later in the year and early 2010.

The brokerage firm also maintained its “underweight” rating on real estate and financial services.


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