MENA Markets on the Rebound

Joe Kawkabani
Managing Director
Algebra Capital Ltd.

Over the second quarter of 2009, MENA markets rallied, resulting in a total return of approximately 28.45% (in USD) as measured by the MSCI Arabian Markets Index.1 Renewed risk appetite, a rise in oil prices to US$69.89 per barrel by June-end as measured by West Texas Intermediate (WTI), and investors anticipating signs of a global recovery all contributed to the turnaround. We believe fluctuations in oil prices do not pose a threat to Gulf economies. After a slump in prices during the second half of 2008 and the onset of the worldwide economic downturn, Gulf governments became the main vector of regional economic activity. Monetary and fiscal stimulus packages have appeared throughout the region, as many governments pledged to spend as much as 20% of GDP to bolster their respective economies. These governments already calculated their spending plans for 2009 based on oil prices of US$50 or less. Should oil prices remain above US$50, some anticipated budget deficits could become surpluses.

Despite a substantial improvement in market performance, the turnaround in MENA stocks has actually lagged that of other emerging markets. MENA has not always been a top priority for outside investors. Given this lag, and the fact that MENA stocks are cheaper than other emerging market stocks, investor interest is re-surfacing.

While corporate earnings in the region slid at a record pace in the fourth quarter of 2008, there was a huge rebound in earnings during the first quarter of 2009. Overall, first-quarter earnings are lower than for the same period last year, largely attributable to cyclical industries, such as petrochemicals. Yet MENA corporations have continued to be profitable, and non-cyclical stocks have also held up well.

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