Middle East and North Africa (Mena) equity markets have continued to gather momentum, with the broad regional index gaining 12.4 per cent in May, taking total gains so far this year to 14.8 per cent.

Rasmala, a Dubai-based investment banking firm, in its Middle East market overview for May, pointed out that the UAE equity market gained 11 per cent in the month amid increased foreign investors' interest.

High oil prices, improved investor sentiment and positive corporate announcements were the main drivers of the positive performance across the Mena markets, it said.

The view came even as the advanced economies of the world begin to face a "deflation-inflation scenario".

"Real estate stocks were the main gainers in the month, led by Emaar, which gained 48 per cent. Arabtec, Sorouh and Aldar gained 37 per cent, 24 per cent and 28 per cent, respectively," Rasmala said.

"Shuaa Capital, a UAE-based investment bank, gained 70 per cent on speculation that the company will strike a deal with Dubai Banking Group regarding its convertible bonds. On the other hand, index heavyweights etisalat and Taqa witnessed zero appreciation in their share price for the month."

The UAE market is trading at a discount relative to its GCC peers and there is room for further market appreciation on the back of improved investor sentiment and increasing foreign fund flows into the market, Rasmala noted.

The Dubai International Financial Centre (DIFC)-based investment bank's outlook was similar for other markets in the region.

Qatar, according to Rasmala, was the best-performing market in the region in May, while Egypt overtook Saudi Arabia as the best-performing Arab market in 2009.

This outlook on Mena – primarily GCC economies – comes even as an analyst based in London gave a cautious note on the advanced economies.

"Low growth and deflation are a risk in the aftermath of the financial crisis, especially for the advanced economies. Moreover, as long as globalisation holds, it is difficult to generate inflation in a competitive world economy characterised by rising unemployment and low capacity utilisation rates," said Riccardo Barbieri, a London-based economist with Bank of America's subsidiary Merrill Lynch.

"Commodity prices could cause a temporary rise in the CPI, but the experience of the past 10 years shows that they cannot create a persistently high inflation," Barbieri said.

However, both Barbieri and the analysts at Rasmala were buoyant on the performance of capital markets in the West.

"Globally, the past month started off with gains in US equity markets, boosted by better-than-expected unemployment figures and banks' stress test results. The rally was put on hold in the third week of the month as the market witnessed selling pressure on concerns about General Motors filing for bankruptcy, the downgrading of the UK's credit rating outlook by Standard & Poor's, as well as the contraction of the US economy at a 5.7 per cent annual pace in the first quarter of 2009. Emerging markets, measured by the MSCI EM Index, continued to outperform, bringing their total gains this year so far to 36 per cent and reaching an eight-month high towards the end of May," Rasmala noted.

"We believe that the recent recovery in corporate bond issuance in the US, Europe and Asia is an encouraging sign. If it gradually spreads to the high-yield securitisation markets, it will mark a success for the central banks and a signal that deflation can be averted," Barbieri said in his report.

Barbieri said the scene is particularly turning encouraging for Japan, the Asian economic giant, which has faced several versions of the financial crisis for the past 10 years.

"Japan's long period of deflation in 1998-2005 was due among the other factors to a credit crunch as banks' capital was wiped out by losses on equity portfolios and real estate. Capital markets failed to provide sufficient financing in the economy."

Within the GCC almost all the financial markets rallied in the past week, Rasmala said. "Saudi Arabia, the largest Mena equity market, ended the month with a gain of 4.8 per cent, taking its 2009 gains to 22.7 per cent. Unlike the previous month where gains were reported across all sectors, the performance among different sectors this month was mixed. Banks and insurance stocks retreated, while petrochemical and telecom stocks gained. Petrochemical stocks, on the other hand, advanced on the back of surging oil prices, which hit a seven-month high. Sabic, which constitutes 11 per cent of the Tadawul Index, gained 37 per cent this month."

Kuwaiti markets followed their GCC peers, the Rasmala analysts noted.

"The Kuwaiti market gained 7.9 per cent in May, bringing total 2009 gains to 4.7 per cent. Agility, the Middle East's largest logistics company, gained 33 per cent in May after the company renewed a contract worth $1.4 billion (Dh5.14bn) with the US army.

"Zain gained 28 per cent in May and has been invited to bid for Iran's third mobile licence after the regulator cancelled an agreement with etisalat.

"Despite reporting a first-quarter loss of KD69.5 million (Dh883m), Global Investment House's share price surged by 55 per cent over the month.

"On the macro front, the Kuwait Central Bank reduced its benchmark rate by half a percentage point to three per cent. Falling inflation and a slowdown in credit growth prompted the bank to cut rates in an effort to boost economic growth," the analysts said.

Qatar equities surged this month by 24.6 per cent, driven by higher oil prices and the government's offer to buy local banks' real estate investments, Rasmala said and ranked the gas-rich emirate as the best performer in the region. "Industries Qatar, the largest listed company in Qatar in terms of market capitalisation, gained 35 per cent on the back of surging petrochemical and fertilizer prices. The Qatari banks index gained eight per cent on the day the government announced it will buy local banks' real estate investments worth as much as QR15 billion (Dh15.13bn). Qatar National Bank, Qatar Islamic Bank and Commercial Bank of Qatar gained 16 per cent, 24 per cent and 28 per cent, respectively, over the month," the report said.

Oman which has been cited by analysts as the GCC country facing the worst impact of the crisis also fared well the last month.

"Oman equities advanced 7.2 per cent in May, bringing their 2009 gains to 1.1 per cent. The positive market performance was largely driven by Bank Muscat which gained 7.5 per cent during the month.

Oman Telecommunications Company gained 2.3 per cent during the month.

"On the macro level, inflation fell to 4.9 per cent in April, compared with 6.2 per cent in March, and the economy has grown by two per cent in real terms so far this year. Higher oil production by non-Opec oil exporter, along with rising oil prices, are expected to help narrow the country's expected budget deficit in 2009," Rasmala analysts wrote.

Egypt, a country not blessed with oil reserves as the GCC, was the best-performing market in the Arab World in May.

"Egypt, the largest market outside the GCC, enjoyed a positive month, benefiting from positive corporate results as well as improved global sentiment.

"The market gained 13.6 per cent in May, taking its 2009 gains to 28.9 per cent and overtaking Saudi Arabia as the best-performing Arab market in the year to date. High liquidity levels were maintained and were led by retail investors, who accounted for around 70 per cent of total market transactions," Rasmala analysts said.

"Telecom Egypt and Commercial International Bank boosted their companies' stock performance, gaining 16 per cent and 17 per cent, respectively.

"Orascom Construction Industries and Egyptian Kuwaiti Holding Company both saw their share price appreciate by 29 per cent and 16 per cent, respectively, on the back of higher fertilizer and oil prices. On the other hand, the death sentence given to Hesham Talaat Moustafa, former TMG Holding chief executive, as well as France Telecom's bid to acquire 100 per cent of Mobinil shares, resulted in an increased level of volatility on the Egyptian stock market during May."

Elaborating on the problems still prevailing in the developed world, Barbieri said Europe now stands at a greater risk of deflation than the US. "Given the approach taken with respect to the banking system, the rigidities in the economy, a strong exchange rate, a smaller monetary and fiscal stimulus and unhelpful demographics, Europe is relatively more at risk of experiencing at least a mild form the Japanese syndrome than US. Policy actions can still avert this adverse scenario," he said.

On the other hand inflation risks will rise again once the economy recovers, Barbieri warned. "Breakevens have risen since the turn of the year on confidence that outright deflation can be averted. Still, the markets are now pricing in a benign scenario in which, for instance, even in five years time the US would be lower than the average for the past 10 years," he said.

He added that a possibility of high inflation plaguing the markets can be characterised only as a risk at this stage.

"We believe that breakevens will rise further as the economy recovers and the Fed and central banks, while talking about exit strategies keep preventing money in order to prevent a collapse," Barbieri said.



Oil rises above $70

Rising oil prices, Rasmala analysts said was the prime reason for resurgence of Mena equity markets, broke a two-day losing streak yesterday helped by a weaker US dollar and encouraging economic data from China.

Nymex July West Texas Intermediate, the US crude oil benchmark, crept back towards last Friday's seven-month high of $70.32 by gaining 79 cents to $68.88 a barrel. ICE July Brent, the European benchmark, rose 88 cents to $68.76.

Kuwait Financial Centre, Markaz, in report earlier this year, cited that almost all the markets in the region are heavily correlated to oil.

DFM has the least correlation to oil and the markets of Oman the highest, it said.

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