Slide in Gulf equities based on negative sentiments rather than company fundamentals

Changing investor perceptions mean global events are increasingly dictating movements in principally 'domestic-only stock markets'

Do away with the herd mentality - for the hardy investor with nerves of steel, there are stock picks out there which are trading at drastically under-valued levels because of the freefall that the region's stock markets have gone through.

'International events are now dictating movements in what used to be principally domestic-only stock markets', says the latest overview of the MENA market performance by EFG Hermes.

'The daily movements for most MENA markets have tended to be in the same direction as the previous day's movement in the US. This is significant since it shows a step change in investor perceptions'.

Real estate stocks have taken the brunt of the hammering, in many cases purely based on negative sentiments rather than anything to do with the company's fundamentals.

The first set of third quarter results have been uniformly positive and there is nothing to indicate that any of the blue-chip real estate names have taken manor hits on their numbers.

'We retain our strong conviction towards 2008 full year results. While we see elevated risks to our 2009-10 forecasts, we expect any changes to involve a fine-tuning of numbers with the broader trend of strong underlying growth more or less unchanged'.

Would this now prompt local investors - the stress being on 'local' - to make a return? 'It is worth noting that the sharp correction in MENA markets - particularly in the GCC - has also been a factor of increasingly thin trading over the past few months, itself a result of the summer period and the religious month of Ramadan', notes the EFG Hermes report.

'MENA markets in general suffered a burst of strong selling pressure upon re-opening after the Eid holidays.

However, we suspect this was driven by the fact that the close period had coincided with on-going weakness in the US and Europe, leading to a build-up of selling pressure across MENA'.

The exposure of Western institutions to the region's stock has now dwindled to levels seen well over two years ago, and could scale down further. It may even do the markets - and local investors - some good as it would give it some time to take stock and reflect.

'Recent events have proven that under extreme circumstances everything can be correlated', the report states.

'Our view that Western institutions would provide a base of stability has been shown to be flawed as such investors have been extremely quick to cash out.

To some extent though, this is also a reflection of the high proportion of 'hot money' that had penetrated some MENA markets and the low representation of traditional longer-term institutional investors such as pension and insurance funds.

'Over time, though, we would expect correlations to revert back to the low levels that have been in place historically'.

Figure facts
'According to stock exchange data, non-Arab investors hold 7 per cent of all listed equity in Dubai (from 18 per cent six months ago), 3.5 per cent in Abu Dhabi (from 14 per cent), and 12 per cent in Oman (from 25 per cent).

In Qatar, non-Qatari ownership has declined from 11 to 9.5 per cent. Egypt does not release data on foreign equity holdings, but Central Bank of Egypt data shows bank net foreign assets falling by $5.6 billion since March, and we estimate that at least half of this drawdown relates to equity outflows'.

Excerpt from EFG Hermes' Global Volatility: Get Used To It report