Business | Markets
Flight of foreign capital adds to market woes
Credit crunch is one factor to have hit stocks but there are signs of a rally.
- By Robin Wigglesworth, Financial Times
- Published: 23:42 September 19, 2008
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So much for decoupling. The MSCI Gulf index is down nearly a third this year, and paradoxically, the foreign capital that was supposed to decrease the volatility of regional equity markets has been blamed for much of the slump.
Despite a rosy regional economic outlook, the credit crunch has compelled international investors to liquidate positions in Gulf stocks. Speculative bets on currency revaluations have also been reversed because of a stronger dollar.
However, while all the region's bourses are now firmly in the red, the causes are far from homogenous. International investors had little exposure to Kuwait or Saudi Arabia, the biggest Gulf stock markets.
Furthermore Saudi Arabia has been the Gulf's worst performer for much of this year, after a tremendous rise at the tail end of last year when valuations became "a little bit stretched", according to Fadi Al Said, Middle East head of equities for ING. Retail investors have also preferred the seemingly safer returns of real estate and initial public offerings.
Dubai has been one of the victim of the international capital exodus, but is also suffering because of jitters over a possible real estate market correction and the extent of a corruption crackdown.
Some Gulf-wide factors have exacerbated the recent decline. Dubai has had a contagion effect on the rest of the region because it serves as a bellwether to many regional investors, according to Osama Shaker, head of investments at HSBC Saudi Arabia. Lower trading volumes over the summer and during Ramadan have magnified the downward trend.
In more mature markets, large insurers and pension funds can usually be depended upon for long-term capital, but they are largely non-existent in the Gulf, except some large state-owned vehicles.
Local banks may not face the systemic risk that is spurring their international peers to hoard cash, but central banks have tightened reserve requirements, limiting leverage that could be used to buy shares.
Shorting may also be exacerbating the negative sentiment. As a result of the informal nature of the market in the Gulf, such activity is difficult to measure, but "hedge funds have targeted key companies with massive short-selling", says Al Said.
"The markets are very shallow so this created downside momentum." There are signs, though, that cheap valuations are attracting investors. All Gulf markets rallied on Wednesday.
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