Vantage View: War fails to dampen Arab markets

Worries about the war on Iraq have made the region's stock markets extremely volatile in the first quarter. Nevertheless, most of these markets ended the quarter higher, with investors betting on a strong post-war recovery.

After retreating in the month of February, following a strong performance in January, most Arab stock markets rebounded in March, closing the quarter higher than at the beginning of the year.

The stock markets of Tunisia, Morocco, Lebanon and Bahrain ended the quarter in negative territory due to specific internal reasons not directly related to the war. March is usually the time of year when dividends are announ-ced and distributed.

This has undoubtedly provided technical support to listed companies who did well in 2002. Other factors that contributed to the good performance of the region's stock markets included the prevailing low domestic interest rates and the impact of higher oil prices on the Gulf countries' economic outlook and corporate performance.

The Amman Stock Exchange (ASE) which recorded a small drop of 1.56 per cent in 2002, after surging by 30 per cent in 2001, ended the first quarter up 0.21 per cent on its level at the beginning of the year. War fears and its expected ramifications on the Jordanian economy outweighed the positive impact of strong economic performance and healthy corporate results.

The ASE started the year on a positive note rising by 1.55 per cent in January. Uncertainty associated with the looming war on Iraq drove the market down 3.71 per cent by mid-March. However, improved corporate performance and announcements of dividends had a positive impact on the market towards the end of the first quarter.

The Beirut Stock Exchange (BSE) fell by 1.47 per cent in the first quarter after posting a gain of 4.32 per cent last year, which was the market's first annual rise since 1997. Lack of sweeping reforms, the slow pace of its privatisation drive and apprehension over the U.S. war on Iraq had a negative impact on the market.

The index, which gained 1.19 per cent by the end of January, following the $4.3 billion aid package pledged at the Paris II meeting, started a downward trend in February, which continued until the end of March. Market activity remained constrained throughout the first quarter, with investors preferring to put their money in fixed income securities.

The Palestine Securities Exch-ange stayed in negative territory during most of the first quarter with the index losing 4.91 per cent by mid-March. The closure and curfews imposed by Israelis and the systematic destruction of Palestinian infrastructure and factories undermined the performance of the market.

The appointment of a Palestinian prime minister and the renewed U.S. and British interest in addressing the Palestinian problem led to a strong recovery in the last two weeks of March, with the index ending the quarter up 5.44 per cent on its level at the beginning of the year.

The Egyptian market registered strong gains of 23.14 per cent in the first quarter, supported by expectation of higher dividends to be distributed by large capitalised institutions. The flotation of the Egyptian pound on January 28 encouraged some capital inflows to the stock market.

Measured in dollars, the Egyptian stock market was down two per cent in the first quarter, reflecting the 25 per cent drop in value of the pound vis-a-vis the dollar during this period. Lack of economic reforms and fears of war repercussion which the government estimates to cost Egypt between $6 and $8 billion, mainly from fewer tourists and lower exports to Iraq, will undoubtedly impact the performance of the Egyptian stock market this year.

The Saudi Stock Market, the largest in the Arab region in terms of capitalisation, surged by 9.9 per cent in the first quarter on top of last year's gain of 3.2 per cent. The primary reason for this rally is expectations of good corporate results as well as announcement of dividends by some companies.

There was also heavy buying in the stock of Saudi Telecom Co as some groups tried to accumulate shares to get a seat on the board. It appears that investors have realised that the war in Iraq is not likely to have any direct negative impact on Saudi companies.

Meanwhile, the price of oil has gone up again which, when combined with the high current Saudi oil production, point towards a strong GDP growth rate this year.

The Kuwaiti Stock Market, the second largest in the Arab world, ended the first quarter with a 21 per cent gain on top of the 39 per cent recorded in 2002. The market's rise is driven by expectation that Kuwaiti companies in sectors like transport, telecommunications, banking and other support services will benefit most from the reconstruction of Iraq.

There is also the expectation that political risk will be gone once there is a change of regime in Baghdad. Share prices got a boost as well from surging oil prices, low interest rates and high domestic liquidity looking for investment. Most of the increase in share prices was recorded by smaller, more speculative companies, while the blue-chip stocks either stayed flat or even lost ground since the beginning of the year.

Share prices in the UAE ended the quarter up 0.57 per cent after rising by 10 per cent last year. Strong corporate performance of listed companies and higher oil prices were outweighed by fears that the war will have a negative impact on the country. Being a trade and transportation hub in the region, with a growing tourism sector, the UAE is perceived to be especially exposed to the negative impact of war.

In Oman, the Muscat Securities Market Index rose by 5.02 per cent in the first quarter after recording a 26.16 per cent gain in 2002. The rise in oil prices and better economic prospects of increased exports of liquefied natural gas kept the market in positive territory.

The Doha Securities Market (DSM), which posted a 36.8 per cent gain in 2002, ended March 8.82 per cent higher. The DSM index witnessed a rising trend early in the year with gains reaching 7.1 per cent in the first week of February due mostly to strong economic performance and higher oil prices.

On top of their negative performances last year, the stock markets of Morocco and Tunisia were down in the first quarter with losses reaching 3.17 per cent and 6.98 per cent, respectively. In Morocco, the absence of institutional investors, weaker tourism sector and lack of economic reforms continued to adversely influence the market.

The Tunisian market, the worst performer among Arab bourses in the first quarter, was negatively impacted by a major drop in revenues from tourism and weaker than expected corporate results for 2002.

To conclude, Arab stock markets have held up pretty well in the face of the ongoing war in Iraq. Although perplexing at first, this performance can be explained in the context of diminishing investment alternatives abroad and at home, with surging liquidity and interest rates on local currencies dropping to levels not seen for years.

Perceptions of risk have also changed, as investors increasingly view the risk/return profile of their domestic markets more favourably compared with the more volatile markets of the West.