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.

It seems that the only positive news we hear about Kuwait is about its Retail sector. A new report is bullish about Kuwait’s retail sector, ranking Kuwait amongst the top 5 retail markets in developing nations. A T Kearney publishes an annual report that ranks the retail market in more than 30 developing nations, assessing thier Country and Business Risk, Market Attractiveness, Market Saturation, and Time Pressure. Kuwait came in fifth (highest in MENA), falling behind Brazil, Uruguay, Chile, and India. The report also measures the attractiveness of the Retai Apparel market, where Kuwait came in third after China and the UAE. Saudi Arabia came in fifth after Russia.

According to the report, Kuwait’s demographic trends have led to retail sector growth of 8 percent annually over the past five years. Overall, retail sales are expected to grow from $8.41 billion in 2011 to $11.92 billion in 2015. Kuwait has one of the highest retail sales per capita of any country in the Index ($4,300) due to Kuwaitis’ high disposable income helped by the welfare state. The key downside to Kuwait is the relatively small market, meaning entry will most likely make sense as part of a regional approach. Saudi Arabia’s market is highly ranked due to its big population and rising income. However, government regulations could hinder entery into the market. The UAE is highly saturated and finding good opportunities in the retial sector is difficult, according to the report.

Yesterday, after the end of the trading session, NIC issued a statement in Kuwait bourse stating that their commitment to sell 46% of Zain was over. The statement ended a USD12 billion deal talks which began in September when Etisalat first announced their interest in acquiring a stake in their Kuwaiti rival Zain. The deal has faced many difficulties, most importantly was the opposition of other key shareholders of the company and the difficulties they faced in trying to sell their stake in Zain Saudi.

What’s next?

When the deal was first announced on September 29^th Zain was trading at KD1.260, then it rallied after the announcement to KD1.360, up 8%. It also ended the year by increasing its’ market cap by 25% since the day prior to announcement.

Zain has fallen 15.8% YTD and broke both its’ 20 and 40 day moving averages; yesterday it broke its’ 200 day moving average.

The Chart above shows a rebasing price graph of both Zain and Etisalat since the announcement of the deal to date. Zain is currently trading at a EV/EBITDA multiple of 6.7x as opposed to its peers of 5x, a 34% premium to its’ peers. Also, it’s trading a P/E 15.4x, against an average of 8.4x- 83% premium. Some might say that this premium was justified as Zain was an acquisition target- but what about now will it fall to match its peers since there’s no acquisition? Using a 2011 EPS estimate of 83 fils and multiplying it with the current average multiple of 8.4x Zain should fall to 0.700.

According to a recent press release by Etisalat, the company reiterated its stand towards Zain acquisition and that it’s still interested in the Zain deal. Bin Ali added that pertinent and suitable information related to the due diligence have been collected and “Etisalat” is in the process to study and analyze the collected information. Consequently the results will be discussed with the sellers in a later stage, and the final results will be presented to Etisalat`s Board of Directors to make a decision in this regard.  Etisalat will inform its stakeholders with the progress of the Proposed Transaction in due course.

In the financial world, oil is traded on various oil bourses based on different financial terms, chemical profiles, and delivery locations with the three most quoted oil products West Texas Intermediate (WTI), Brent Crude, and the UAE Dubai Crude acting as a gauge for the entire oil industry. Depending mostly on density and sulphur content oil products are categorized and priced. Brent is a waterborne crude, while WTI is a landlocked American benchmark. Historically, mainly due to location and supply-demand factors, Brent Crude has traded at +/- 3 USD/bbl to the WTI Spot price. Whenever price anomalies appeared between the two, arbitrageurs captured the price differential and normalized the spread. The graph below compares the price of WTI for delivery in Cushing, Oklahoma with that for Brent in Europe.

By looking at a long-term graph, you usually cannot differentiate between the prices of the two. However, late 2010 the divergence started to appear eventually reaching over $11/ bbl by the end of January 2011. There has been a lot of speculative reasoning for the sharp price divergence, such as volatile currency movements, demand variation, and political. On February 17^th 2011 the spread reached a record $16.51 reflecting ample stockpiles at Cushing Oklahoma, civil unrest in the MENA region, and unknown future demand of China. With Brent pricing being used to determine prices of approximately 70 percent of traded oil and supply shocks expected to arise from the unrest in Libya one can expect the a spread to persist, but an important question remains and it is that where have the arbitrageurs disappeared?

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!

The Blackberry banning virus is spreading all over the world, with countires starting to ban the service within thier borders after talks with Research in Motion, the Blackberry maker, broke down. The UAE and Saudi Arabia have already announced the banning of the service, with Kuwait, Indonesia, and India threatening to do the same unless certain conditions are met. The problem between the phone maker and these countries is that the countires want to setup proxy servers to moniter the Blackberry usuage (i.e. moniter emails, messages, etc.), which the company is refusing to do so. But there might be light at the end of the tunnel, as India may have reached an agreement with RIM, and Kuwait announced yestersday that RIM has agreed to block 3,000 porn sites.

This news led me to the question of the impact of the Blackberry’s ban on RIM’s earnings. The biggest market for the Blackberry is the US, followed by Canada (home of RIM), then the United Kingdom. The rest of the world contributes to 27% of the company’s revenues. The UAE and Saudi Arabia contribute a very small part of that, thus the ban in these countires has a minimal effect on the company’s earnings. However, India and Indonesia are both a bigger threrats. The two countries, two of the most populus countries in the world, contribute more to RIM, and represents a very ripe environment for future growth.

My bet is the effect of the ban on the local telecommunication companies is far greater than on RIM. Also out of the four companies (STC, Etisalat, Mobily, Du), Du and Mobily will be affected the most as these two companeis are concentrated within the UAE and Saudi Arabia, respectively, as STC and Etisalat have large busniess operations spanning through numerous countries.

The Middle East was considered one of the hottest markets globally and it was attracting a vast amount of foreign investments in the past decade. However, due to the tightening of credit and the deterioration in the global economy, Middle East’s foreign direct investments (FDI) were pulled back by nearly a quarter.

A recent report by the United Nations Conference on Trade and Development (UNCTAD) stated that inflows of FDI to the region dropped by 24 percent reaching USD68 billion in 2009 after six years of growth.

On a country to country basis some countries had different fate from the others; for example, in 2009 Qatar had an increase of FDI inflows of 112 percent and Lebanon had an increase of 11 percent, while the UAE was hit the most and the FDI inflows decreased by 71 percent. Saudi Arabia remained the largest receiver of foreign investments, with inflows reaching USD36 billion, 52 percent of the middle east’s total FDI inflows.

Although the FDI inflows were hit hard in 2009, the FDI outflows were hit harder- they decreased by 36 percent, reaching USD23 billion. This decrease was mainly attributed to the UAE as their FDI outflows fell from USD16 billion to USD3 billion. Saudi Arabia FDI outflows increased the most, from USD1.5 billion to USD 6.5 billion. Kuwait was the largest investor, with USD9 billion in outflows.

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.

The plans were informally discussed with the creditor’s representatives, in which they were offered different prepayment proposals, none of which will have a “haircut” (reduction in principal payment). However, all will have no or low interest. The proposals includes a full repayment of principal within five years without any interest; repayment within seven years with 2% interest payment; or repayment within at least eight years with an interest of close to the 1 year Libor. The final proposal needs to be approved by the Dubai government.

Looking at the CDS (Credit Default Swaps) chart below, investors seem to be relatively happy compared to a month ago (Dubai World to Restructure its Debts). The news on receiving the full principal payment decreased the CDS spreads by 200bps and tightened the yields of some Dubai Inc. papers. Although these are good news, it remains that forgoing interest payments will affect the future cash flows of banks.

If the 97 creditors do not agree on a deal, Dubai World may start the bankruptcy procedures.