Azzam warns of Gulf irrational exuberance
Gulf markets will continue to grow, but caution is watchword as trading multiples rise.
Leading Gulf markets economist, Henry Azzam, ceo of Jordinvest, told delegates at Dubai’s first Gulf Capital Markets conference that the strong performance of the region’s markets would continue, however, investors must be cautious and selective in picking stocks in 2005.
Borrowing from US Federal Reserve chairman, Alan Greenspan's famous speech on the overvalued western markets of the late 1990s, Azzam told delegates: “Irrational exuberance means we should not rule out the possibility of a correction.”
However, he told the Gulf Capital Markets conference, which was organised by ITP Events: “If it does happen, it’s probably going to be healthy and is unlikely to be a major correction. However, it will bring back the balance to price earnings ratios and to the valuations we have seen."
He noted that the Gulf region recorded the second highest growth rate in the world after China, in 2004. A combination of high oil prices, low interest rates, government policy, some capital repatriation, but more importantly, more capital staying within the region, were key drivers behind last year’s growth.
He pointed to the Shuaa Capital Composite Index, which measures the performance of the six Gulf Cooperation Council (GCC) states, and which showed that overall performance was up 60% in 2004, compared to 59% for the year before. “Total market capitalisation across the GCC is US$520 billion. More than US$300 billion is the capitalisation of Saudi Arabian stocks, but we are seeing the value of shares listed across the wider GCC rising considerably."
Commenting on the outlook for stock markets, he said the region had good reason to be positive: “We are still positive on the prospects for this year, and look forward to seeing what kind of corporate results companies reveal over the next few months.”
The best performers were UAE stocks, which were up around 103%, Saudi was up 85%, with the leading Sabic shares delivering a 171% increase in value. Qatar’s index was up 70% and Bahrain rose by 30%, whereas Oman did well in the first half of 2004, but petered out during the second half, although it still ended the year up 24%.
International markets saw another year of lacklustre growth, with relatively poor performances. This, said Azzam, had discouraged investors from looking to the West for investment ideas. This led more funds to be invested locally and regionally. “So what we have at the moment is overvaluation, when you think the average US price earnings (PE) ration is below 20.”
Azzam said that although the bull market seemed to be continuing, we had already seen an early correction in the Saudi market, in the first days of 2005.
He urged investors to go cautiously this year to avoid overvalued stocks within the region. He said current Saudi and UAE PE ratios could be seen as a sign of overvaluation, which required investors to be “selective” in these areas.
However, he noted that Omani stocks looked undervalued with a composite average PE of around 12x earnings. Kuwait required investors to be “selective” with PE’s of around 14 and Bahrain remained dependent on what happened with Saudi.
He predicted that consumer expenditure would continue to be strong, supported by the same underlying factors of the past couple of years. “The ‘wealth effect’, boosted by oil prices and rising real estate values have made consumers feel richer and therefore happy to spend more, so this will likely continue in 2005.”
Saudi Arabia’s economy, which grew by 5.3% last year, is expected to slow to around 4% this year. Similarly the UAE, which saw estimated growth of 10% last year, will be closer to 7% this year.
The region’s star performer, Qatar, which saw an estimated 12% growth in 2004 will continue to show strong support of around 8% this year. Kuwait and Oman were also expected to continue to do well.