A Topsy-Turvy Second Quarter

   The first half of 2011 has been a tough ride for investors. Disaster in Japan and the ongoing euro zone debt crisis have sent markets reeling, but perhaps the most telling long-term impact will come from the so-called Arab spring.

   Funds investing in the Middle East and North Africa (MENA) have had some difficult calls to make and the hardest task of all has been to protect client capital that has been developed during the preceding years. Since the beginning of the year, the region has seen unprecedented political unrest which spread from Tunisia to Egypt, Oman, Bahrain, Libya and Syria. However, despite the upheaval, the long-term prospects for the region remain good. Equity markets in the region, such as in Qatar and Saudi Arabia, have rebounded strongly from lows at the height of the political crisis and have now wiped out almost all of the losses for the year. The Middle East equity capital market recorded an 81% increase to $8.3 billion in the first half of 2011 compared with $4.6 billion during the first half of 2010.

   The longer-term picture shows investment funds in MENA countries have struggled to grow and reflect economic developments, especially in the six countries of the GCC which benefit from sustained growth and increased oil revenues. Trouble is, the predominance of sovereign wealth funds and pension funds which means that these giant institutions control the majority of assets.

   The first two months of the year were globally negative, while stock markets in the region recovered in March.

   The actual size of the Middle East wealth management market is not very large; however, the opportunity it provides is indeed significant.  The MENA region is unique in many instances. Now, the region is rapidly emerging as an economic force to be reckoned with.

Saudi Arabia:

   As with any emerging market, a main concern for investors would be how liquid the regional stock markets are. By far, the most liquid market by trading volume is Saudi Arabia and today, one can only access the market because it has limited foreign ownership restrictions through other mutual funds.

   Saudi-based Samba Financial Group, the kingdom's second biggest lender by market value, witnessed a steady investment portfolio that stood at SR70.2 billion as of June 30, compared with SR67.5 billion a year earlier, an increase of 4%. On the other hand, Saudi Hollandi’s total investments as at June 30 stood at SR10,665 million compared to SR12,946 million as at the same period last year, a decrease of 17.6%.

   Outflows for Gulf funds halved to $26.1 million with Saudi Arabia, the largest Gulf Arab stock market, accounting for the bulk of the amount.

Qatar:

   Focusing on Qatar, as the world’s largest exporter of liquefied natural gas, its economic outlook is by far the most positive among the GCC peers, thanks to its lowest dependence on oil and the extensive government expenditures in the gas sector during previous years.

   Qatar also continues to feature highly. Good fundamentals and strong reserves are enough, in most managers’ eyes, to offset the fact that Qatar is actually a very small country with an extremely limited population and a stock market that counts only a handful of liquid companies.

   Qatar National Bank Group (QNB) was announced the Best Bank in the Middle East and Best Bank in Qatar at the Banker Middle East Industry Awards ceremony held recently in Dubai. QNB’s results for the second quarter of 2011 were exactly on track with the Gains and impairment reversals on investment securities accounting for Dh98m of the 2Q11 revenue beat.

Oman:

   Oman is also a fairly small market, but managers highlight how its fundamentals are becoming more favorable, as the country has managed to lower its marginal cost of oil production. This should support further investment.

   Bank Muscat, Oman’s largest lender by market value, reported an increase in its profits and in May, BofA Merrill Lynch upgraded Bank Muscat to “buy” from “neutral” and said that growth will likely gain momentum this year.

Kuwait:

   Kuwait, the second largest regional market in terms of market capitalization after Saudi Arabia, remains the subject of debate. “On balance, most fund managers are willing to give it the benefit of the doubt”.

   Boubyan Bank announced its results for the first half of 2011 which show a growth in the finance portfolio to KD 920 million at the end of June 2011 compared to KD 711 million at the end of June of last year; recording a growth rate of 29 percent.

   National Bank of Kuwait (NBK), the largest Kuwaiti bank and the highest-rated in the Middle East, along with its clear strategic vision, helped the bank maintain its strong financial position through different crises and earned it international recognition, the latest being the "Best Bank in the Middle East" award for 2011 from both Euromoney and Global Finance magazines.

Dubai:

   Individual investors on NASDAQ Dubai, increased their share of equities traded value on the exchange to 9.4 per cent in the second quarter of 2011. This was a rise from 7.4 per cent in the first quarter of 2011.

   Total equities traded value reached USD209 million in the first quarter of 2011, making a value of USD411 million in the first half of 2011.

Bahrain:

   The main improvement in Bahrain was the assignment of an A/V5 fund Rating to “The Royal Capital Mena Fixed Income Plus Fund” by Standard & Poor’s Fund Services (S&P). The fund has outperformed its benchmark, HSBC/Nasdaq Middle East Aggregate Bond Index, since its inception in March 2010. Mr. Ahmed Talhaoui, Head of Asset Management at Royal Capital, believes that this achievement represents a milestone, not only for Royal Capital, but also for the MENA Asset Management industry, and this Rating will position the fund as a benchmark for other Fixed Income funds in the region.

Newly Launched Funds:

   The first half of 2011witnessed a mixed trend in the Mena-focused fund market, with an encouraging first quarter and a cheering second quarter amid dwindling numbers of new funds in the region.

   The rate of fund launches in the MENA region during the past 5 years has been relatively steady, with 82 funds launched annually on aveage, against 14 to 15 funds either liquidated or merged. 2007 was the most successful year with 114 net new funds, while there were 43 net new funds in 2010 and 25 new funds in the first half of 2011.

   The first quarter of this year registered a total of 13 funds (8 Conventional and 5 Islamic) hitting Mena market against 21 (12 conventional and 9 Islamic) in the previous corresponding period of 2010; the second quarter witnessed 12 new funds (8 Conventional and 4 Islamic), against 11 (6 conventional and 5 Islamic) in the second quarter of 2010.

   Equity funds took the limelight during the second quarter of 2011. Their number was hovering at 9, followed by 1 Balanced fund, 1 Fund of Funds and 1 Fixed Income Fund.

Exchanges:

   Abu Dhabi Securities Exchange (ADX) was the best performing market among other GCC exchanges in the second quarter of 2011. ADX concluded the 3-month period with an increase of 3.72% compared to the previous quarter, as its index closed at 2,704.19 points. Out of 65 listed issues on ADX, 58 stocks participated in trades during the second quarter of 2011; out of which, 19 stocks recorded gains, while 38 issues closed lower and 1 stock closed with no change. Abu Dhabi Commercial Bank was among the gainers with 20.48% increase, Union National Bank as well increased by 23.97% along with an increase of 12.94% for National Bank of Abu Dhabi.

   Dubai Financial Market (DFM) continued previous quarter’s downward trend, ending the second quarter of 2011 in the red zone at 1,516.93 points with a decrease of 2.51%. Out of 64 listed stocks in DFM, only 43 were active during this quarter; by the end of which, 28 stocks declined, 14 stocks advanced and 1 stock closed with no change. SHUAA Capital for instance, closed at a loss of (-15.32%); while International Financial Advisors closed at a gain of (33.75%).

   Bahrain Bourse (BB) extended the first quarter’s losses, as BB index concluded the second quarter of 2011 in the red zone too, dipping by 7.37% when it closed at 1,319.71 points. 34 stocks participated in trades during this quarter; 6 stocks ended the quarter advancing compared to 23 issues that shed losses and 5 stocks closed with no change in price.

   Quatar Exchange’s (QE) index closed the second quarter of 2011 down by 1.12% at 8,361.07 points, compared to 8,456.17 points recorded by the end of the previous quarter, due to the weak trading activity by market investors. 23 out of 42 listed issues on QE ended the quarter with gains, while 19 stocks closed lower.

   Kuwait Stock Exchange’s (KSE) price Index concluded the second quarter of 2011 at 6,211.7 points, down by 1.33% compared to 6,295.6 points registered by the end of the first quarter. Out of 215 listed issues in KSE, 185 stocks participated in trades during the second quarter of 2011. 75 stocks closed on gains, while 93 stocks closed lower and 17 stocks remained unchanged. National Bank Of Kuwait (NBK) for instance, closed with 1.75% gain and Manafae Investment Company gained a remarkable 20.37%; on another note, Commercial Bank of Kuwait (CBK) closed at a loss of (-6.38%) along with Global Investment House (-8.54%), to name a few. Kuwait Financial Center was among the stocks who have closed unchanged.

   At the end of the first half of 2011, TADAWUL All Share Index (TASI) closed at a level of 6,576.00 points, gained 482.24 points (7.91%) over the close of the same period of the previous year. On an YTD basis TASI lost 44.75 points (0.68%).

   As a bottom line with exchanges, seldom in the underdevelopment of capital markets a positive thing. However, in the case of the MENA region, the lack of stock exchanges in several flashpoint countries may well turn out to be a blessing in disguise.

   A report by HSBC Global Research concluded that “in many instances in the past 10 years, GCC markets have actually risen during times where global emerging markets have come under pressure”.

   A large portion of assets under management (about 50 percent) are with funds that invest in short-term instruments, such as money-markets or trade finance. Much of this is concentrated in Saudi Arabia, Egypt and Morocco. In Saudi Arabia, trade finance funds account for 64 percent of Saudi mutual fund assets; this likely reflects local preferences for Sharia-compliant instruments. In Egypt, money market funds account for 90 percent of mutual fund assets.

   The possibility of bringing Qatar into the MSCI Emerging Market index group would be very beneficial and would almost inevitably see an increase in interest and flows. Part of this would be expanding the membership base of the exchange. The Qatar government has been supporting this by allowing local commercial banks to join the exchange and to expand their product range to services such as brokerage, custody and portfolio management.

   The announcement that the Gulf Cooperation Council (GCC) is considering the inclusion of Jordan and Morocco came as a surprise to many. GCC leaders had welcomed Jordan, who requested entry to the club, and invited Morocco during their summit in Riyadh on May 10. Jordan’s bid to join the GCC will enhance trade and investment opportunities within the bloc, according to a study by the Dubai Chamber of Commerce and Industry.

   Despite the current underdevelopment of collective investment schemes, the GCC states offer the greatest potential for growth in investment fund assets. Assets under management in GCC-domiciled funds are the largest in Saudi Arabia, Bahrain and Kuwait. The mutual fund industry in Saudi Arabia experienced robust growth in this decade.

   There is a solid base going forward in terms of inspiring financial trust and demonstrating integrity to the international community. There is also a nice mix of modernity. We have to strike the right balance between the speed of change and the qualitative manner in which the changes are made.