Below is a recap of the performances of GCC stock markets for the first half of 2011:

Two incidents occurred in the Gulf last week that I think are a step forward in the right direction. The first was the Saudi bourse fining Banque Saudi Fransi $13,330 for failing to swiftly disclose changes in its board. The second incident was the suspension imposed on Arabtec’s CEO Riad Kamal from buying or selling shares in the Abu Dhabi Exchange for six months due to him selling shares less than 10 days before announcing news about the company.

These two incidents illustrates the drive in the Gulf for a more transparent market, assauging some fears of foreign investors. The transparency issue has been a key barrier for the inclusion of some the Gulf states within the MSCI emerging market classification, which would lead to increased foreign investment and coverage. The Gulf is moving in the right direction. Hopefully, Kuwait’s Capital Market Authority will be up and running this year!

Kuwait’s Weighted index outperformed the region (given that it significantly underperformed the region in 2009), and Dubai lagged the region (Dubai debt probelms).

The best and worst performers of 2010 on the Kuwait Stock Exchange are:

In closing, we wish you a happy and prosperous New Year, filled with financial joy!

Due to the recent oil spill in the Gulf of Mexico, BP is required to fetch out $20 billion to cover the costs of the spill, which include cleaning expenses, fines, lawsuits, etc. The company is also under threat of being bought out by a competitor. So, the CEO in a last chance move is trying to raise some equity to pay for the cleaning expenses and fend off potential bidders. A Saudi newspaper reported that an unnamed Saudi investor is planing to buy a 10-15% stake. BP’s CEO Tony Hayward is in Abu Dhabi to entice the emirate to invest in his troubled company. Kuwait Investment Authority, which already owns approx. 2% of the oil giant, has stated that they have no intentions of investing further in the company.

BP is also trying to sell some assets to gain some cash. Chinese giants Petro China and SINOPEC have shown interest in acquiring some assets. A company owned by the Kuwait Petroleum Corporation has also shown interest.

Is this infliction point in BP’s storied timeline the end of the British company? Or a start of a new era?

Dubai has been stealing headlines in the past couple of months, unfortunately only spilling bad news.

 “Dubai World Seeks to Delay Debt Payments as Default Risk Soars” Bloomberg (Nov 26, 2009)

 “S&P downgrades ratings on four UAE banks” Arabian Business (Dec 3, 2009)

 “Dubai World asset sale nears, debt talks plod.” Reuters (Feb 3, 2010)

State-owned conglomerate, Dubai World, shocked global markets when it requested a standstill on its USD26 billion worth of debt. This wrote-off all signs of recovery, even though Abu Dhabi gave them a little help.

After a contraction of 3% in real GDP, the UAE is expected to grow 2% in 2010; the slowest rate in the GCC. This was due to lower oil prices along with collapse of the real estate. Moreover, Dubai debt issue is expected to pull down the economy as it accounts for 33% of UAE’s GDP.

CDS are not looking good

Dubai’s debt insurance has been gradually raising; they are up 130 bps this month. Dubai CDS rose above 600 bps for the first time since November; which means that in order to insure USD10 million it will cost USD 600,000.

Dubai is considered one of the riskiest sovereigns in the world, behind only Argentina, Venezuela, Ukraine and Pakistan.

Low inflation

The inflation in the UAE has hit a nine year low of 1.5%, primarily due to a decrease in the households category.

Equities

In relative terms, UAE equities might look cheap when compared to the emerging markets, as the UAE trades at a 7x P/E multiple against 13x for EM (2010E). Nevertheless, we have to adjust for various aspect to get a better “apples to apples” comparison. UAE’s debt-to-equity ratio is 83%, while the EM is 33%. If we take the assumption of raising equity to level the D/E ratio to 50%, UAE’s equities will trade at a P/E of 12x, which doesn’t look too attractive.

Below is a chart of Dubai Government holdings:

Related posts:

Dubai Default Implications

Burj Khalifa: The 10 Billion Effect

By: Naser

It seems nowadays that Abu Dhabi is buying everything! Every week you hear in the news about a company owned by the Abu Dhabi government buying a stake in a global company.

This time it’s the Ultimate Fighter Championship. UFC is a mixed martial arts competition, where two combatants fight for 15 min or until one is knocked out. It was announced this week that Flash Entertainment, a company wholly-owned by Abu Dhabi government, met with UFC owners Lorenzo J. Fertitta, Frank Fertitta III and Dana White, and agreed to acquire a 10% stake in the company. The value of the deal was not announced.UFC’s popularity has been growing, as more and more people are watching this sport. In April, a UFC fight will be held in Abu Dhabi.

Other recent acquisitions by Abu Dhabi include Virgin Galactic, the Carlyle Group, AMD, the Chrysler Building, and most recently Hyatt Hotels, among others.

2009 was a good year for the GCC and the world, but how good? Well, only “relatively good!” The global financial crisis took its toll on the GCC market as it was hurt by the dull impact of the declining oil prices and the overall economic slowdown. As the recession reduced demand for oil, prices dropped to as low as $32.70 a barrel on January 20^th 2009, after touching a record $147.27 a barrel in 2008. In 2009, the weakening dollar bolstered the investment appeal of commodities, and the “Chinese effect” has helped push oil prices back to the 80’s range.

Default. In finance, default occurs when a debtor has does not meet his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is a failure to pay back a loan. It may occur if the debtor is either unwilling or unable to pay their debt. This can happen with all debt obligations including bonds, mortgages, loans, and promissory notes. (wikipedia)

This term was rarely heard of the good old days and was used only in textbooks not on Wall Street. After the collapse of Bear Stearns in the summer of ’07 and later Lehman Brothers, this term has been used in the papers daily. The wave of defaults has reached us here in the GCC on September of ’08 and what seemed to be impossible became so realistic as many companies became on the verge of bankruptcy. Reality has gotten uglier since governments and government-related entities (GREs) became new default candidates.

What will happen if Dubai World really defaults?

• Foreign investors will not be willing to invest and participate in the UAE credit market. This will spill0vver to Abu Dhabi and even prevent Abu Dhabi’s USD1 trillion spending program in the next decade owing to the fact that funding from local banks will be insufficient.

• Due to the added risk factor, cost of funds will be significantly higher specifically in Dubai, Abu Dhabi, and general GCC.

• The downgrade on several UAE GRE’s by rating agencies, making them non-investment grade securities, will plummet their prices as many global fixed income funds will liquidate non-investment grade securities.

• Creditors will force Dubai World and Dubai Holding to FIRE sell international assets, recognizing severe losses as most investments were bought at peak prices.

• GCC markets as a whole will feel the torment, as the banking system will fracture due to the high exposure to UAE GREs. This will further deteriorate loan books, thus adding further to the write-downs and possible bankruptcies, causing both equity and fixed income markets to collapse.

• The international community will begin to question the integrity of the UAE government and their dedication to their entities, which will lead to further FDI outflows.

BY Naser:

The Kuwait Investment Authority announced that they sold their stake in Citigroup for $4.1 billion. The KIA bought its stake in January of 2008 in the form of preferred stock. They later transferred their holdings into common stock. The stocks were initially purchased for $3 billion, which yields a 36.7% return on the investment. The recovery of worldwide markets in March of 2009, which was headed by financial stocks, allowed for such good returns during a period when the S&P 500 lost almost a quarter of its value.

It is interesting to note that the value of the common share of Citigroup has fallen 85% from $25 to $4 during the period of the KIA investment. It is also noteworthy to add that the Minister of Finance replied to a parliamentary question in September 2009 that the KIA has a long-term view on the Citi investment.

In response to the sale of the Citigroup investment, the Kuwait Minister of Finance Mustafa Al Shimmali announced that the funds generated from the sale would be reinvested in global markets rather than the domestic market as authorized by the KIA mandate. He also added that the Citi sale has been planned for some time, and no plans exist for any more exits from current investments.

Kuwait’s stock exchange has been lagging other regional markets, and the Kuwaiti economy is not expected to recover as fast as other Gulf States. So if the Ministry of Finance and the government are not planning to reinvest the funds generated by the Citi sale domestically, they should invest other funds generated from the budget surpluses to rejuvenate the economy and spend money on developmental project that would yield long-term benefits to Kuwait.

I know this week we have been a bit slow with the articles. The reason is that Keynes is overwhelmed with work and I was at a conference in Dubai and I wasn’t able to post from there. And yes, I attended the speech that was given by H.H Sheikh Mohammed bin Rashid, Ruler of Dubai and PM of the UAE

Sheikh Mohammed bin Rashid was the guest speaker at the MENA equities conference held by Merrill Lynch in Dubai. Other than the great presentation skills, his speech changed the attitude and sentiment of all the asset/fund managers I met, and turned the green light back on to Dubai and Abu Dhabi. I guess most of you read what he said as Bloomberg and Reuters were there and covering the story instantly, but just in case you didn’t, in a nutshell he said that Dubai and Abu Dhabi are one, and they will back each other up if one needed they other. Hence, Abu Dhabi will cover whatever debt obligations Dubai has IF they were not able to pay, which he doubted. This statement lifted up investor confidence as both equity and credit market surged. Dubai Inc. names sukuk such as Dubai 14, JAFZA and Nakheel 09 were up ½, ½ and 1 point respectively which shows that confidence is back to the UAE’s market. Moreover, he said that the second tranche of Dubai’s USD20 billion is well received and will be used to fund future obligations.

Some qoutes from his speech:

- “The ties between Abu Dhabi and Dubai should not be questioned”, Sheikh Mohammed saying the two wealthy emirates were one “family.”

- “We will be there for each other when we need it.”

- “And I want to tell those people who nag about Dubai and Abu Dhabi to shut up.”  Indicating his frustration towards news agencies by differentiating between the two emirates.

Amazing conference and an amazing speech!