Vantage View: Will Arab stock markets maintain their upward trend in the second half?

All the Arab stock markets surged in the first half of the year, with the Kuwaiti market recording the best performance measured in dollar terms, followed by Saudi Arabia, Egypt, Qatar and Palestine.

Several factors contributed to this rally, including decreased regional uncertainty with a quick resolution of the war on Iraq and a new drive towards the adoption of the "road map" for peace in the Palestinian territories, expectations of future reconstruction contracts and sales to Iraq, better than expected corporate earnings, high liquidity and positive economic fundamentals.

For example, higher oil revenues will boost government expenditures while lower interest rates will make borrowing cheaper, thus reducing the cost of operations to companies and render time deposits less rewarding compared with investing in the stock market.

The Amman Stock Exchange (ASE) ended the first half at a record high of 200.85, up 17.8 per cent on its level at the beginning of the year.

This followed a loss of 1.56 per cent last year and a gain of 29.8 per cent in 2001. Most of the increase came in the second quarter this year as the index registered only a slight gain of 0.21 per cent in the first quarter.

The quick end of the war on Iraq and optimism about the expected opening of the Iraqi economy to Jordanian exports sent the stock market soaring.

The ASE also benefited from the resumption of peace efforts in the Middle East and the reduction of local interest rates in line with the drop in dollar rates.

The imposition of a five per cent tax on interest on deposits at Jordanian banks encouraged some investors to allocate a higher percentage of their deposits to the local stock market. With an average price earning ratio of around 16, share prices are no more considered to be undervalued.

Nevertheless, the fundamentals of the Jordanian economy are still strong suggesting that the stock market is expected to continue its upward trend in the second half of the year, however, on a selective basis with shares of companies with good mid year results outperforming the market.

The Beirut Stock Exchange (BSE) rose by 9.98 per cent in the first half of the year, after posting a gain of 4.32 per cent last year and a loss of 26.7 per cent in 2001.

The strong profits recorded by the real estate heavyweight, Solidere, and the relative improvement in the balance of payment which saw the country's foreign reserves rising above $10 billion were behind the market rise in the second quarter, following a drop of 1.47 per cent in the first quarter.

Market activity is likely to remain slow with investors preferring to direct their attention to fixed income securities. We are concerned that structural reforms have receded in priority to political initiatives and would therefore advise caution.

Positive developments in the Palestinian-Israeli conflict led to a 30.87 per cent rise in the Palestine Securities Exchange during the first half, following a 22.5 per cent decline in the index last year.

Shares are still considered to be grossly undervalued and should benefit from further improvement that may take place in the geopolitical atmosphere in the second half of the year.

The Al Tadawul All Shares Index (TASI) of Saudi Arabia closed the first half 43.17 per cent higher following a gain of 3.22 per cent last year. The 30 per cent floatation of the Saudi Telecom Company (STC) gave the market a big push early in the year.

The stock market was also supported by firm oil prices, better than expected corporate results, high liquidity, low interest rates and lack of alternative investment opportunities.

The approval by the Saudi cabinet of a new securities law setting the stage for establishing a formal stock exchange should reflect positively on the market in the second half of the year.

However, the stock market index is now trading at all time high in terms of valuation multiples, with a price/earning ratio exceeding 20 compared to an average of 14.8 from 1995 to 2000. There is still scope for appreciation in selected stocks, but the Saudi market is likely to change from a bull market to a "stock pickers" market. While STC, for example, is quoted at a price/earning of 23, SABIC and the banks are trading at 16-18 range.

The Kuwait Stock Exchange was the best performer among Arab stock markets last year and the first half of this year. Its index recorded an impressive 51.16 per cent gain in the first half on top of 39 per cent posted last year.

The market surge was propelled by expectations that the end of the war on Iraq would bring security to the country and gains to the private sector from participation in the rebuilding of Iraq.

The quick end of the war, stable oil prices, higher liquidity, low interest rates and optimism about second-quarter corporate results drove the market to record high in the second quarter.

The market is now due for a correction particularly because the appreciation in stock prices has grossly outpaced earning growth especially for the smaller companies listed on the exchange.

The smaller markets of Bahrain and UAE rose by around seven per cent in the first half, much lower than elsewhere in the region because of the limited liquidity in the two markets compared with the Gulf's larger markets.

Given the positive outlook of these two markets, there is a good chance that share prices will catch up with those of Saudi Arabia and Kuwait. We remain bullish on Bahrain and UAE for the second half of the year.

In Oman, the index of the Muscat Securities Market rose by 24.21 per cent in the first half after recording a 26.16 per cent gain last year. Better economic prospects, including a surge in exports of liquefied natural gas, healthy corporate results, increased demand for banking stocks and stable oil prices, contributed to the market upward trend.

The Doha Securities Market rose by 27.5 per cent in the first half of the year following a 36.8 per cent gain last year. The two markets are expected to surge higher in the second half of the year, even though the performance may not match that of the first half.

The Cairo and Alexandria Stock Exchange registered strong gains in the first half of the year reaching 73.71 per cent. However, the Egyptian pound has lost around 30 per cent of its value against the U.S. dollar since Egypt applied a free float system on January 28.

Accordingly, first-half market gains would drop to around 43 per cent when measured in dollar term. Shares that had significantly done well were those that are less leveraged and are relatively less sensitive to the weakness in the Egyptian pound (e.g. the telecom and export oriented companies).

With the recent stabilisation of the exchange rate, currency concerns will gradually fade away in the months ahead and firms that have been negatively affected by the recent devaluation and have under-performed, such as banks, cement, and pharmaceuticals, are likely to do better in the second half of the year.

The stock markets of Morocco and Tunisia ended June in positive territory with gains reaching 12.1 per cent and 4.19 per cent respectively, following l