Some foreign capital starts to return to Gulf bourses

DUBAI - Money from Southeast Asia, Europe, and the United States is starting to flow into Gulf Arab stock markets, attracted by sharply reduced valuations and despite a recent sell-off in emerging markets, fund managers say.

By (Reuters)

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Published: Sun 11 Jun 2006, 6:17 PM

Last updated: Sat 4 Apr 2015, 3:24 PM

The emerging-markets slump, over fears of rising interest rates and a slowing US economy, has so far had little effect on Gulf bourses, which have suffered a major correction of their own this year.

Main Gulf Arab bourses are trading on an average of 15 times forward earnings, a sharp correction from last year when many shares traded at more than 40 times earnings.

“The correction has created an opportunity for international investors who’ve wanted to get into the region,” said Haissam Arabi, head of asset management at Dubai-based investment bank Shuaa Capital, which manages $3 billion.

“They have been monitoring over the past few years but valuations have been ridiculous at 26 times earnings at their peaks.”

Gulf Arab markets have been on a roller coaster in recent years, rising sharply but then slumping.

The index of Saudi Arabia, the largest Arab bourse, soared almost fivefold between the end of 2003 and February this year. Since then it has fallen close to 44 percent.

Institutional investors in the region are showing similar interest after the correction, but smaller investors, many of whom lack basic market knowledge, are selling after losing heavily.

Arabi said money is coming from pension funds, endowments, investment banks and emerging market fund managers in Britain and United States, accounting for about half of a $240 million Shuaa fund that invests in regional markets.

Haitham Al Kadi of Forsyth Partners in Dubai, which manages $3 billion globally, said more than $100 million has come into the region since the markets started declining, most from pension funds in Southeast Asia.

“What we’re seeing now is huge interest among international investors mainly from Southeast Asia to tap into our markets,” he said. “They see that valuations are attractive and they see the boom in the economy with oil and banking.”

“We are seeing more and more Swiss banks taking interest. They are stringent with due diligence and they are studying the markets now.”

Gradual opening

Governments in the region restrict foreign investment, which accounts for less than 5 percent of the combined Gulf capitalisation of nearly $1 trillion, fund managers said.

That means residents generate most of the trading. Foreign investment in equity markets is generally channelled through mutual funds.

“The only problem for international investors is finding the right channel to get investment into these markets,” Kadi said. “We’re working out a structure with banks to develop a way to funnel money into these markets.”

Other deterrents to foreign investment include a lack of transparency - listed companies sometimes fail to issue earnings reports - and more recently the growing risk aversion of international capital.

But most fund managers don’t see a strong correlation between the Gulf Arab markets and emerging markets in other regions.

Fund managers said booming local economies will still attract money to Gulf markets, but a significant flow could take time to develop and would depend on the degree Gulf governments loosen investment rules.

“I think you will see that wave with a lag time first,” said Hashem Montasser, head of regional asset management at EFG-Hermes investment bank. “They need to do their research and the next step is having the opportunity to invest and then investing.”

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