• Market Capitalization Erosion
MENA Market Commentary- Continuing with our discussion on the stock market erosion in MENA, the market cap of the MENA stock market went down by as much as 47% YTD as on 25th Nov’08, making the region one of the worst performer globally despite high growth expected in the region and much lower levels of exposure to sub prime. Quite a high figure when compared to the country responsible for the global melt down. For example, the US as measured by S&P Index shed 41% of its market cap while UK’s FTSE 350 Index market cap shed 37% as part of the correction.
The market cap to GDP ratio is a good indicator of the valuations of stock markets in an economy. However, determining what percentage level indicates undervaluation has been hotly debated in recent times. Nonetheless, a ratio of less than 100% is considered to be an indication of the attractiveness of stock markets In 2007, according to statistics at the World Bank the market cap to GDP ratio for the U.S. was 144% while that of UK at 139% while as per our estimates, the ratio for major MENA equity markets was 133%.
A question looms large in the minds of investors about the magnitude of the fall in stock markets in the region and what levels indicate a bottom. In light of that, we have tried to look at the fall in market cap of these markets as a percentage of our estimated GDP forecast of 2008 in each of these economies. We observe that Saudi Arabia’s market has been impacted the worst with the market cap erosion to GDP ratio standing at 68.2%.
Figure 01: Market Capitalization Erosion (YTD) as a Percentage of GDP
Source: Bloomberg, Zawya & Global Research
*DFM & ADX
YTD as on 25th Nov 2008.
The market cap to GDP ratio of Saudi Arabia stood at 133.1% at the end of 2007, nearly in line with world markets despite higher growth expected in the region. However during 2008, the stock market has tumbled 59.9% YTD with the ratio now standing at 52.8% indicating a glaring opportunity to enter the market and make long term gains. The Egyptian stock market, is another market that has been badly impacted with its market cap eroding by as much as 62.0% YTD as compared to 2007 year end period. The total market cap erosion as a percentage of our estimated GDP forecast of 2008 now stands at 59%.
The current market cap to GDP ratio is abysmally low with some of the major economies’ ratios at half of what they had been at the end of 2007. What does this mean to us? It does not mean that we should put all our money in shares tomorrow, but instead warrants some thought.
Table 02: Market Capitalization to GDP Ratio – Major MENA Equity Markets
Source: Bloomberg, Zawya & Global Research
*DFM & ADX
YTD as on 25th Nov 2008.
Oil price declines are significant but not disastrous. Most government budgets and investment programs in the Middle East will remain intact unless oil falls below US$50/barrel. A prolonged drop below US$50 is highly unlikely because global demand for oil continues to rise while supply is largely static. The governments in the MENA region have amassed huge reserve funds which they could deploy to support regional growth if the outlook turns bleak. The government has saved 70% of their surplus oil revenues over the past five years and Sovereign wealth funds in the MENA region have over US$1.5 trillion at their disposal. Therefore, the growth and funding of various projects is less likely to be impacted.
Although we agree to the fact that the MENA economies have been impacted, we believe that the fundamental factors have not majorly changed and this should help the market tide over the recent declines. In the wake of the recent sell-off, the regional markets are trading at an attractive level. It is common knowledge that the maximum returns are made when the investments are made in challenging times, just when the markets are about to rebound. Current situation offers just one such opportunity and the investors who will have the courage to enter the market now are likely to make the highest gains.
