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

MSCI announced their decision on whether to upgrade the UAE and Qatar markets from Frontier to Emerging or not. They decided against the upgrades. The issues that the MSCI sited against the upgrade were the foreign ownership limits and the introduction of the “delivery-versus-payment” system. The UAE has a foreign-ownership limit of 49%, and has implemented the “delivery-versus-payment” system, but the MSCI has said that they needed more time and more feedback from market participants on the new system. Qatar has a 25% foreign ownership limit. The markets in the UAE have expected an upgrade, which caused the market to shed a 1% today after the announcement was made. An upgrade to Emerging from Frontier to either countries would have led to increased liquidity and interest from investors around the world. MSCI will look again in December on whether upgrading UAE and Qatar to Emerging markets is a possibility. Kuwait is a Frontier market and is not a contender to be upgraded to Emerging due to the numerous hurdles the Kuwaiti market faces.

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!

World Cup fever is on as the DSM rallied approximately 7% since the day FIFA announced that Qatar won the 2022 bid to host the World Cup.

It is estimated that Qatar will spend nearly USD65 billion on infrastructure. This sum represents 53% of 2010E GDP. USD4 billion will be allocated to building nine new stadiums and renovating three existing ones. USD50 billion will be spent on the construction of new transport systems. In addition to that, Qatar has promised to provide 90,000 hotel rooms by 2022 (currently it has 15,000 rooms only). Banks will benefit from the stronger economic activity and higher credit demand over the next 12 years. USD60 billion will be financed by Qatari banks- the combined assets of all banks as of end of 2009 are USD129 billion. However, a key challenge for Qatari banks is to secure long term funding to finance these long term projects. Issuance in the credit markets is expected to increase to support the long term funding.

400,000 world cup fans visited South Africa this year, which is equal to 25% of Qatar’s population. This will really boost tourism and consumption in that period. Tourists in South Africa spent around USD2 billion- 1.5% of Qatar’s GDP. Out of all the countries that hosted the world cup, Qatar has the smallest GDP, population, and land size.

In 1989, FIFA named the U.S. as the host of the 1994 World Cup under significant international criticism because of the perceived weakness of the national team and lack of interest in the game. Now, soccer is as popular as ever in the U.S. as it has been in every World Cup since then and even ranked as high as 8th. The same scenario is happening again, with the announcement of Qatar as the host of the 2022 World Cup it seems that the President Obama-led criticism campaign is nothing more than pure sour grapes. Let’s not forget how far Qatar has come in a relatively short period of time, as it not only has the money to showcase itself in 12 years, but has taken the initiative in transforming the tiny island into a knowledge-based economy  that has the finances, resources and technology to overcome any obstacle and the 30-minute presentation has truly undermined how the tournament could unify a torn apart region.

That said, Qatar is a victim of the winners curse, whose basic idea is that there is a certain prize of uncertain value sought after by multiple bidders and as a result the winner is cursed to overpay to acquire the prize. Overpay? Not by bribing, but forgiving ones values and being partially stripped from the economic benefits of hosting the event and being left alone with prestige and global recognition. The winner, being the host country, will be either worse off in absolute terms or that the value of the asset is less than anticipated. Who else is sharing the bed with Qatar then?

Well, it’s a Swiss registered charity that’s sitting on more than $1.1 billion in equity called FIFA. And why didn’t the bid go to the U.S.?  There is simply more monetization to be made in a whole new region of the world, the MIDDLE EAST. Between sponsorships, broadcasting rights, tickets, and merchandise, FIFA makes money and has a share of what Qatar’s Organizing Committee revenue. Looking at South Africa, FIFA earned $2.5 billion in profits (0.7% of South Africa’s GDP) thus making more money from the world cup than the host did. The most optimistic predictions said the South African economy gained 0.5%.

Since the 2010 financial results of FIFA are not yet published we’ll use those of 2006. Of the total revenue recorded in the 2003-2006 period (CHF 3,238 million), CHF 2,986 million (92%) came from FIFA events. The lion’s share of this figure derived from the sale of television rights (CHF 1,685 million) and marketing rights (CHF 714 million). The total revenue generated by the 2006 FIFA World Cup was CHF 2,858 million.

The Organizing Committee (OC) 2006 FIFA World Cup generated overall income of EUR 556 million, consisting mainly of revenue from ticketing (EUR 262 million), FIFA’s contribution (EUR 177 million) and sponsorship payments from the six Official Suppliers (EUR 65 million). The local organizing committee’s expenses totaled EUR 400 million, thus resulted in a surplus of EUR 156 million. This surplus was split in line with an official agreement between FIFA and the organizing committee. FIFA thus received a net share amounting to EUR 45 million. FIFA is certainly a winner in the bid, from a monetary stand point while the World is the winner with Qatars bid, as they are upto one hell of a amazing event. Congrats Qatar!

Last week Monitor Group and Fondazione Eni Enrico Mattei released their quarterly report about Sovereign Wealth Funds (SWF). SWFs are funds that are owned directly by governments, invest in a set of diverse financial assets, and have no pension obligations. These funds include the Kuwait investment Authority, Abu Dhabi Investment Authority, Qatar Investment Authority, among others. The report published by Monitor and FEEM gives us a good insight on the secretive SWF, shedding some light on the trends that the fund followed, sizes of investments, and selected deals.

The latest report, which wraps up 2009, informed us that most of the public investments made by SWF were made during the last two quarters of 2009 (85% of what the funds had invested in 2009). It showed us that Qatar was the biggest spender of the year, which had invested more than $32 billion in 14 publicly-reported transactions, including Porsche and Volkswagen. The Asia Pacific region was the most popular investment destination, followed by Europe, MENA, and North America.

The reports give us a good insight on the trends of SWF, and can be especially helpful for money managers targeting money from SWF.

The report can be downloaded from: http://www.feem.it/userfiles/attach/20105171327204Monitor-FEEM_SWF_AnnualReport2009.pdf

Qatar Holding LLC has become the fifth owner of Harrods since its establishment in 1849. Back in March and amid speculation of a potential sale of Harrods, Mr. Al Fayed repeatedly insisted that the London landmark “is not for sale and is not being sold.”

Well, I can think of 1.5 billion reasons why Mohamed Al-Fayed would sell the store, and retirement is certainly one of them. Today it became all official: Mohamed Al-Fayed announced the sale of Harrods Ltd. to Qatar Holding LLC, the investment arm of the Qatar Investment Authority, for £1.5 billion ($2.2 billion). After owning and managing the department store for more than 25 years and turning it into a unique luxury brand, he decided it was time to retire. “I’ve been working for the past 50 years of my life, 25 of them in Harrods, and I wanted to be able to spend more time with my family, especially my four grandchildren.” He added: “I’m 77 now and I wanted to be able to walk out of Harrods not be taken out in a wheelchair!”

The Egyptian businessman has sold the store for nearly triple the  £615 million he paid in 1985. Amongst more Al-Fayed’s interesting ownerships are the English Premiership football team Fulham Football Club and the Hôtel Ritz in Paris.

Mr. Al Fayed firmly believes that Qatar Holding LLC has both the vision and financial capacity to support the long-term growth of the department store. Qatar Holding surely has the financially capacity, with the never ending natural gas and the ever-growing portfolio of investments. Qatar is the largest shareholder in Songbird Estates Plc, which controls more than half the buildings in the Canary Wharf estate in London, J Sainsbury Plc, and Barclays Plc. It’s also the second-largest shareholder in London Stock Exchange Group Plc and has a stake in Volkswagen AG, the German automaker.

Finance expert Justin Urquhart-Stewart says “The Qatari group have been buying a lot of property in Knightsbridge recently so they probably see it as nice to have a grocery store down the road.” I just hope the legacy he has built in Harrods would continue and grow as he envisions..

We can see from the graph that Iraq is the highest, i.e the most change in the Dollar amount since 2005, mainly due to the reconstruction of Iraq after the war. The UAE comes second. But what is interesting to see is that in April/May of 2009, developments in the UAE dropped substantially, since many companies cancelled their projects due to liquidity constraints. No other country saw that big of a drop. What made me curious is that Qatar is the most lagging country among the pool, which is hard to believe since we hear a lot about projects in Qatar, especially relating to the Oil and Gas industry.

Reading the first couple of lines, one might think that investors should reverse all positions and exit the Doha SM.  However, I would recommend doing the exact opposite; overweight Qatar. It has the highest expected GDP growth, strong government support, moderate inflation levels, and cheap valuations. Qatar is the hottest place to be in 2010!

With a 47% increase in LNG exports, Qatar is expected to record the highest GDP growth globally (14%). The growth of 14% surpasses all GCC nations, BRICS, emerging and developed markets. The increase in LNG exports and GDP growth will have a direct affect on banks and petrochemical companies and will definitely enlarge overall corporate bottom line earnings.

Qatar had one of the highest inflation levels of 17% in 2008; nevertheless, Qatar is expected to record an increase of 1% only in inflation.

Strong economic prospects accompanied with relatively low valuation calls for a strong buy. DSM expected 2010 P/E is at 9.8x, higher than Dubai and Kuwait only which both have valid reasons to justify such low P/E multiples. Moreover, Qatar has both high dividend yields and ROE of 4.5% and 18% respectively.

Qatar and Saudi Arabia both have a positive outlook.

Our next stops will be Dubai and Kuwait.

After ending the rollercoaster ride that we saw in 2009, we remain cautious as we enter 2010. It is expected that the second half of the year will be a better performer than the first. The reason for that is due to the negative short-term outlook for the financial sector (higher costs of funding along with low margins). The financial sector is significant to GCC stock markets as it makes up more than 50% of the total market cap of these markets. There are reasons for optimism as the expected decrease in credit cost and increase in balance sheet growth (especially in Qatar and Saudi Arabia), it is expected that the second half of the year will improve. Due to Dubai’s debt issues, it will take investors some time to regain confidence in the market and deploy more investments.

Higher Cost of Borrowing = Lower Earnings

The aftermath of Dubai World’s restructuring added a couple of bps to the not so cheap cost of debt, and quasi government bonds are now priced equal to the corporate bonds. According the Credit Suisse analysis, each 100bps increase in the cost of corporate debt reduces 2010E earnings by 5% in the UAE and 7.2% in the KSA. This indicates how even the strongest economy in the GCC is vulnerable to the cost of borrowing.

Highly Levered

In mid 2007, GCC equities were the least levered in the world with net debt to equity of only 9%. However, currently they are the most levered equities with net debt to equity of 73%. Having said that, this adds more risk of capital infusion and dilution of current shareholders.

Interest Rates

Any increase in global interest rates will be positive, especially for the Saudi banking sector. A better financial sector translates into a surge in stock market returns. Credit Suisse’s Global Strategy team expects global rate hikes in the second half of the year.

Earnings Looks Good

On the earnings side, Qatar has not only the highest ROE in the GCC but also in the world. Qatar’s expected 2010 ROE is 17.7%. Furthermore, Qatar and Kuwait have the highest dividend yields in the GCC standing at 4.5% and 4.7% respectively.

Valuations at a Discount

The GCC is trading at a discount against its peers. The GCC is currently trading at a 2010E Price/Earnings multiple of 10x (GCC ex Saudi is 8.4x) which constitutes a 20% discount to Emerging Markets. In terms of Price/Book, the GCC is trading at a multiple of 1.5x which translates into a 20% discount to Emerging Markets. On the other hand, the high leverage (73% Debt-to-Equity) results in a 2010E EV/EBITDA of 9.2x which stands at a 40% premium to Emerging Markets.

In my next 4 articles I will write about each country’s outlook separately (Kuwait – UAE – Saudi – Qatar)