<?xml:namespace prefix = v ns = "urn:schemas-microsoft-com:vml" /><?xml:namespace prefix = w ns = "urn:schemas-microsoft-com:office:word" />The GCC stocks witnessed mixed trends in the first month of the new year. Market heavyweight <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Saudi Arabia continued to surge as it reported a monthly gain of 12.5% in Jan-06. Oman and Bahrain markets followed with monthly gains of 11.7% and 6.5% respectively. On the other hand UAE and Qatar market saw some selling activity in the month.
We believe that the short term direction of the markets will be dictated by the earnings announcements and the upcoming IPOs as they will suck out liquidity from the market. Investor confidence about the corporate earnings seems to be strong and the early indicators of the net profits posted by the corporates/banks are quite encouraging. Investor friendly regulation such as reducing the par value of the stock by Oman stock market regulator are welcome as it will increase liquidity and retail participation in the market.
Table 01: Index Performances
|
Country |
Measured by |
|
Index Close |
MTD Growth (%) |
YTD Growth (%) |
Source: Respective Stock Exchanges and Global Research
Ras Al Khaimah – Emerging as a favorable investment destination
Ras Al Khaimah (RAK), the fourth largest among the seven emirates that constitute the UAE, had a GDP of AED7.83bn in 2004, having grown by 12.6% over the previous year. RAK is dominated by the services sector which accounts for 60% of its Gross Domestic Product (GDP). The other major sectors include agriculture, livestock and fisheries which account for 17% with manufacturing contributing 8% and building and construction 9%.
The emirate had a population of 0.2 million in 2004, with an annual population growth rate of 5.1%. Inflation was low, with the average annual growth in Consumer Price Index during 1999–2002 being 2%.
The emirate also has thriving international trade with a host of countries within and outside the GCC region. Major exports from RAK include ceramic tiles, medicines, cement, crushed rocks, and fresh fish. Imports include clinker, live sheep, cars and gold. The main export destinations are Saudi Arabia, Bahrain, Kuwait, Qatar and Oman, while the emirate’s imports come from Iran, Oman, India, Japan, Bulgaria, Italy, Egypt, the United Kingdom, Australia and Greece. For 2004, RAK’s exports amounted to AED0.61bn, whereas imports were at AED5.75bn, leading to a trade deficit of AED5.14bn.
RAK is also a major re-exporter in the region. Re-exports, comprising of machinery & sound recorders, mineral products, foodstuff & beverages, chemicals, textiles, and base metals, were made to Sultanate of Oman, Ukraine, Czechoslovakia, Qatar, and Russia. For 2004, RAK’s re-exports amounted to AED1.7bn.
As the northernmost emirate in the UAE, RAK has a unique geographical advantage due to its location at the crossroads of one of the busiest sea and air routes in the world. Besides boasting of MinaSaqrPort and the RAKInternationalAirport, the emirate also has a Free Trade Zone, which allows 100% ownership and 100% repatriation of capital. Being about 100 kms. away from the bustling international city of Dubai also confers the emirate with its own advantages. RAK offers a less expensive, but equally viable alternative to Dubai for business, trade and commerce. The increasing costs in Dubai may help RAK attract industries to the Emirate. Cost is a critical factor for setting up new projects. The set-up costs in RAK are relatively low. Land is almost being given for free for a period of five years, with low leasing costs thereafter. Energy costs are low and so are the living costs.
Considerable efforts are now being made to capitalize on these advantages by attracting new industries and commercial ventures, and by encouraging further development of existing industrial sectors. Priority is being given to the development of warehousing, cold storage, transport and distribution services for packing and re-export to the Gulf States, other countries in the region and to international market. Provision of maintenance support, fabrication services and other support services to the shipping sector in the UAE and the region is another focus area. The emirate is simultaneously encouraging major tourism projects that utilize the emirate’s natural resources and other picturesque locations, which make the emirate’s tourism sector a promising investment avenue. Steps have also been taken to set up a University City, to cater to the sub-continent and the Arab market. Health services is another potential investment area.
The RAK government is reported to have recently issued a freehold decree allowing foreigners and expatriates to have complete ownership of properties within RAK Properties' projects in Ras Al Khaimah. Under the royal decree, RAK Properties can sell its residential, commercial and tourism units, that are part of the company's projects, as freehold and without a time bound ownership deed. The decree is expected to give a huge boost to the economy of the emirate.
New investments worth over $1bn have been planned in RAK. Some of the projects that are expected to come up in the emirate in the coming years are as under:
|
New Industrial/ Technology projects in RAK |
Investment estimates (US$ million) |
Status |
|
Glass factory expansion (Arc International, France) |
100 |
Under construction. Completion in phases 2005, 2006 and 2007 |
|
New Cement project (Penna Cement, India) |
60 |
Under construction. Completion in Q1 2006 |
|
CSEM UAE (CSEM, Switzerland) |
12 |
Under construction. Completion in Q4 2005 |
|
New DVD Factory (Primus Tech investment, Switzerland) |
70 |
Trial production started. Second phase in 2006 |
|
New Wind Turbine Factory (Renewable Energy Inc, USA) |
70 |
Under construction. First phase Completion Q1 2006 |
|
New Hygiene products factory (Beaufort International, Switzerland) |
26 |
Under construction. First phase Completion Q1 2006 |
|
New Polyester chips and films project (JBF Industries, India) |
80 |
Under construction. First phase Completion Q3 2006 |
|
New Free Zone/ Industrial zone (in Al Jazeira Al Hamra) |
50 |
80% committed/ booked in free zone area. 100% booked in non free zone area |
|
Cement project expansion (Gulf Cement) |
110 |
Under construction. Completion 2006-2007 |
|
Cement project expansion (Union Cement) |
200 |
Under construction. Completion 2006-2007 |
|
RAK Ceramics expansion (RAK only) |
135 |
Plant 10 completion in Q4 2005. |
|
New Porcelain tableware project |
15 |
Trial production Q3 2005 |
|
Al Hamra Power Company |
157 |
Under bidding. Completion 2006-07 |
|
T O T A L |
1,085 |
|
Source : Industry research, RAK Investment Authority and media sources.
The favorable investment climate that the Emirate offers is expected to attract sizeable investments across various sectors in the days to come. RAK is expected to present a viable investment destination to potential investors not only from the Arab world but from other parts of the world too.
GCC real estate sector buoyed by the unhindered capital flows
In 2005, real estate continued to evolve as one of the important sectors in the GCC region, aided by high liquidity and increasing demand from various quarters. This was aptly reflected in the valuations of listed companies and the sheer increase in the number of them. Market capitalization of the sector formed 6.7% of the total market capitalization in GCC. UAE has seen the most action, with the sector contributing 18.3% of the total market capitalization in that country.
Table 02: Size of the real estate sector in terms of its contribution to GDP and market capitalization
Source: ‘Global’ Research, contribution to GDP of 2004, market capitalization as on 13th Feb 2006
Growth pattern of the real estate companies in the region more or less followed the global trends with lesser dependence on rental streams and increasing focus on development, speculative property purchases and fund management. Owing to the enormous liquid assets that most of these companies possess, this trend could be expected to continue.
Very high liquidity was the single-most important factor to buoy the sector in the last two years. While the key driver continued to be high oil revenues, other factors such as high government capital spending, easy availability of credit and the establishment of real estate funds investing in the region aided the cause. Size of real estate funds invested in GCC increased to almost US$2bn in 2004 from a paltry US$42mn in 2002. At the same time, large chunk of GCC money (estimated at US$300bn) invested in the developed markets were repatriated back. Foreign capital too played a role, prominent being the Iranian investments in UAE.
The huge capital flow into the real estate markets was driven by the investor confidence in the sustainability of burgeoning demand. With 36% of the GCC population below 15, the region would continue to witness huge housing demand. The booming economies are attracting large number of expatriates too, which bolsters the rental market. In addition to this internally generated demand, there is also a large foreign interest in terms of tourism or to own holiday homes in places like Dubai.
In the face of very high demand, supply more or less lagged behind in the last two years, leading to drastic increase in property prices. This has been particularly true for the low and middle end housing market. Government initiatives to improve the landscape in places such as Doha and Abu Dhabi led to forced housing shifts, worsening the supply crunch in this segment. High quality office space continues to be in short supply, especially in Dubai, Qatar and Saudi Arabia. Shortage of hotels is acute in most of the places, more so in Dubai, Doha and Muscat. Industrial property is set to bring huge returns in the next few years, with the unwavering focus on manufacturing in countries such as Qatar and Saudi Arabia and places such as Abu Dhabi and Sharjah.
However, huge supply is set to come in a few segments promising to match or even outstrip demand in about 2-3 years. Dubai continues to see unhindered supply of high end property in anticipation of investments from abroad. Bahrain is set to enter an oversupply situation for high quality office space in a year or two. Per capita retail space has touched very high levels, even by global standards, in most of the major cities in GCC.
Absurdly high land prices would continue to be a major factor in the years to come. Land prices as a proportion of the total project cost on an average increased to as high as 25% in Kuwait and Qatar. This is very high compared to the international norm of 10-15%. However, land prices continue to be relatively low in few other countries such as Oman, which could see more investment, speculative and opportunistic demand in the years to come.
Institutionalization of the GCC markets
In the GCC region, in the near past, there seems to be a gradual domination of the institutions in the financial markets. We are increasingly witnessing the growth in the mutual funds industry with investment banking firms taking a lead in introducing funds catering to both the domestic and international markets. The institutionalization in the capital markets in the GCC region will experience further growth on the back of investment funds combined with the growth in venture capital industry and increase in penetration levels by the insurance sector and pension funds. With the increase in institutionalization, corporate governance has improved as the companies know that there are analysts, both buy-side and sell-side who are constantly looking at their operational and financial performance and any adverse reaction can have direct impact on their credibility.
The retail investors all over the world including the GCC pay strong attention to the Fund booklets that they release every month so that they know what are the changes in their holdings which tell the investor about the outlook on the market/industries/companies. This gives an idea to the retail investor about the investment opportunities which they try to buy which the big funds have already done so. In the IPO’s too, there is strong presence of institutional investors who take strategic stake in the IPO or through private placements.
One of the most important developments in the GCC stock markets is the start of the active investment intermediaries such as investment banks and investment companies that have helped in the development of capital market by making available diverse, customized product-mix to the investors. Through quality research provided by these investment banks, transparency has increased and now investors can make a more informed decision, boosting confidence in regional capital markets. Also we are witnessing that the GCC stock exchanges have been investing heavily in the adoption of the new technology platform in relation to trading, clearing and settlement in the securities market. It should help the retail investors who can trade through broker or on the net and they can be assured that nobody gets the preferential treatment.
With the new/amended capital market laws in the region, the introduction of BahrainFinancialHarbor and DIFC, the region seems to be a hot destination for the institutional investors who are coming in drove to tap the potential of the burgeoning capital market of the GCC region. However, we still feel that the institutional as well as retail investors need more sophisticated products for trading, hedging and investing to help markets be more efficient along with a proactive regulatory framework. We feel that the GCC markets still have to go long way in this. However, we feel that international institutional investors can share best-practices with the local investors/partners and help in creating a truly investor friendly climate and promote opportunities for those who move investment flows.
Market activity
The market saw slightly subdued trading with 7.7bn shares being traded at the value of US$184bn. This is attributed to the investors staying away from the market during the holiday season. Also, the investors seem to have adopted “wait and watch” policy as the earning reports have just started trickling in. We expect an increase in the trading activity once the market participants get a broader picture of the profitability of the corporates/banks in the region.
Table 03: Exchange Activity
|
Country |
Total Volume Traded |
Total Value Traded (US$) |
Market Cap (US$) |
No. of Transactions |
|
Bahrain |
41,621,860 |
67,924,426 |
18,534,942,654 |
1,963 |
|
Kuwait |
2,981,415,000 |
4,884,708,918 |
43,375,222,377 |
112,189 |
|
Oman |
41,095,793 |
304,337,532 |
13,652,000,000 |
34,624 |
|
Qatar |
62,579,356 |
1,586,468,684 |
81,813,693,410 |
78,383 |
|
Saudi Arabia |
1,150,985,120 |
168,063,033,333 |
726,149,319,524 |
6,585,540 |
|
UAE |
3,438,501,431 |
9,745,981,350 |
213,059,251,624 |
270,754 |
Source: Respective Stock Exchanges and Global Research
The market capitalization of the Saudi market increased to US$726.1bn which represented around 66% of the total GCC market capitalization. In Jan-06, the aggregate market depth was heavily tilted towards the advancers as 269 stocks reported monthly gains as compared to 162 decliners. Saudi Arabian stock market saw broad-based buying interest as it witnessed 67 stocks reporting monthly gains as compared to only 10 decliners.
Table 04: Market Breadth
|
|
Advancers |
Volume |
Decliners |
Volume |
Unchanged |
Volume |
Total |
|
BSE |
18 |
36,201,360 |
8 |
4,611,331 |
21 |
809,169 |
47 |
|
KSE |
80 |
2,188,231,000 |
60 |
641,506,500 |
20 |
151,677,500 |
160 |
|
MSM |
71 |
27 |
