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Good or bad time to launch first-ever ETF for UAE stocks?

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The National Bank of Abu Dhabi has today launched the first-ever exchange traded fund in Arabia that covers the 25 most actively traded UAE stocks. It is listed on the Abu Dhabi Stock Exchange, and makes its debut just a day before Saudi Arabia gets its first ETF. Both are open to local and foreign investors.

The minimum investment is a bit steep at almost $136,000 and is clearly aimed mainly at foreign institutional investors to help reduce market volatility.

Blue-chip ETF

The NBAD OneShare Dow Jones 25 ETF will comprise stocks listed on the three trading markets of the UAE. Financial and real estate stocks make up 56 per cent of the fund, while no single share will account for more than eight per cent.

The ETF will be traded and quoted like other securities on the Abu Dhabi Stock Exchange. The Dow Jones UAE 25 index is off nine per cent this year, and up 35 per cent in the past year. Meanwhile, Falcom Financial Services is to offer the first-ever ETF in Saudi Arabia from tomorrow, with further details awaited.

Now this is indeed an attractive way for foreign institutions, and high net worth individuals to invest in the UAE stock market. UAE stock markets crashed in late 2005 and have not recovered since. A market bottom could be close and a major buying opportunity evident.

Indeed, the imminent settlement of the $26 billion Dubai World debt rescheduling might be the signal that the worst uncertainty is over and that markets will make progress from here. Certainly the UAE bourse looks undervalued in relation to the much better recent performance in Saudi Arabia.

Global clouds

However, what if global financial markets choose this as a moment for a correction, and oil prices slump as they did in late 2008? Then the UAE bourses will doubtless be dragged down yet again, perhaps this time to a real bottom.

In stock markets timing is everything. All the same putting money into the long-term future of the UAE does look a winner with its low extraction cost energy sector and huge hydrocarbon reserves, progressive leadership, ambitious expansion plans and net creditor nation status.

Written by Peter Cooper

March 25, 2010 at 9:11 am

KHI investors should accept a gift from silly Prince Alwaleed

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Prince Alwaleed’s holding company has made an offer to buy out the shares in Kingdom Hotel Investments that it does not own, and investors would be wise to seize this generosity.

Most hotel groups all around the world presently have assets up for sale. In Dubai Union Properties has publicly stated that it is in negotiations to sell its Ritz-Carlton in the Dubai International Financial Centre even before it is finished. Prince Alwaleed himself has been trying to sell The Savoy in London.

Hotel doldrums

So why would Prince Alwaleed want to buy shares in KHI when hotels are a hard sell all over the world? Basically the owners just cannot get the prices that they want because their business models do not justify such prices in a recession.

It is true that the KHI listing on the Nasdaq Dubai has been a disaster and dogged by poor liquidity from Day One, but then there is a cross listing in London.

But yesterday’s $5 a share offer for the outstanding 44 per cent of KHI offers a 25 per cent premium to the current share price. That values the group at $843 million against yesterday’s full-year earnings reported at $22 million, up 27 per cent on 2008.

KHI has its assets spread across emerging markets including Africa, and the prince clearly believes that the stock market is undervaluing the future potential gain in these countries.

But then again you can hardly argue that emerging markets are undervalued from an equity perspective at the moment. Most have almost doubled since the lows of last March and have strongly outperformed the industrialized world. The downside risk from here is obvious.

Cashing out

So the choice for investors is simple: do you cash out of a disappointing stock at a high point in the cycle with a 25 per cent buy-out premium, or wait for the next market downswing to wipe you out?

Admittedly Prince Alwaleed is thinking longer term but his optimism about emerging markets may well prove unfounded. China in particular is an economic powder keg about to explode, and downturns in emerging markets dependent on China, like Africa, will be particularly vicious.

Foreign investors in Africa have not had much success since the end of the British Empire and turning a quick profit is the only sensible thing to do in such unstable countries.

Written by Peter Cooper

March 16, 2010 at 9:56 am

Posted in China, Hotels, Saudi Arabia

Real interest rates rocket in Saudi Arabia, Dubai

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The rates of interest that business actually has to pay for loans are soaring in the Gulf of Arabia as the Greek financial crisis further undermines confidence in financial markets.

Credit default swaps linked to Dubai debt jumped 43 basis points to close at 627 points last week, while the kingdom’s biggest property developer Dar Al Arkan saw its Islamic bond sale fall short at $450 million despite a 10.75 per cent annual profit, which in practice is the same thing as yield on a conventional bond.

Loan sharks

Bank loans are harder to obtain and carry high interest rates. ArabianMoney learned last week of a Cyprus based bank that is planning to offer loans in the Gulf at 10 per cent but only with absolute surety over the same amount of money.

This makes it very difficult for some businesses that are short of cash to continue in business as the cost of interest is squeezing already tight profits. For property developers it often makes it impossible to borrow to finish their buildings.

However, interest rates are a function of a market economy and work to direct the allocation of capital to where it will get the best return. So high interest rates are also a sign of over-capacity and the fact that there is more property than occupants in places like Dubai right now.

In theory high interest rates will help to keep the property supply down and support rents and prices to allow the market to recover rather earlier than if everybody got a loan and carried on constructing buildings that have no immediate economic purpose.

Pressure on profits

That said high interest rates are a pressure on the local economy that it can ill afford in the aftermath of the global financial crisis, a slump in trade and the real estate crash. Specific action to create low-cost home loans would be useful, for example.

For savers on the other hand these are better times. Inflation is not currently a problem. Prices are actually deflating, particularly for housing and office rents. Therefore higher rates of interest are actually worth something to savers.

UAE local and foreign banks also carry an explicit guarantee from the federal government, and that has to count for a great deal in this uncertain world. For the credit worthiness of the UAE government is beyond doubt with its huge oil reserves and sovereign wealth funds.

Written by Peter Cooper

February 14, 2010 at 9:12 am

Saudi posts post 8.4% slump in trade as UAE credit growth dives

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Those global economists who think the Gulf Oil States will help to pull the world out of recession should look again at the latest data. Falling container volumes at the ports in Saudi Arabia signal a downturn, not a recovery, as does a big contraction in credit growth in the UAE.

Container volumes at the kingdom’s ports fell by 9.1 per cent to 11.9 million tonnes in November in comparison with the same month a year earlier, according to the Saudi Ports Authority. Imports were down 14.9 per cent to 4.9 million tonnes, while exports fell 4.9 per cent to 6.9 million tonnes.

8.4% fall in trade

For the January to November period total container volume in the Arab World’s largest economy slumped by 8.4 per cent to 129.3 million tonnes.

Then again consider credit growth in the UAE, the region’s second largest economy. Between 2003 and 2008 the annual growth in total bank credit grew from 18.4 to 38.4 per cent. Last year it plummeted to 2.4 per cent, and the Central Bank predicts credit growth will stay low in 2010.

Both the new figures for Saudi trade and credit growth in the UAE are consistent with economic recession, and that is clearly the immediate outlook for the Gulf Oil States.

The rebound in oil prices from the lows of December 2008 has prevented the situation from being worse than this, but total oil revenues fell in 2009 with lower prices and output. The knock-on effect on the non-oil sectors is clear, although this has been compounded by a real estate crash in the UAE.

Recession hits

However, the kingdom is not avoiding the slowdown as some economists hopefully suggested it might. Trade data is amongst the most reliable from which to make economic projections, and not generally prone to later statistical revisions.

That said the Saudi Arabian trade figures are better than the 16 per cent slump in China for 2009, the country most often cited as likely to lead the world out of the worst economic slump since the 1930s.

It could still be that in relative terms the Gulf States are something of a safe haven for business activity, but untouched by global realities they are most certainly not.

Written by Peter Cooper

February 9, 2010 at 9:04 am

Looking back 30 years to see into the future

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At the Davos World Economic Forum participants are often encouraged to peer 30 years into the future. But what about looking back 30 years and recalling the dreams of that time for the future and using that as a guide as to what might or might not be achieved in the future.

This correspondent will return to Oxford University for a meeting of alumni in June after an absence of 30 years. What did the world look like then and what did we dream about?

Actually there were not so many dreamers among the spires then. Students were an apathetic lot and seldom went to meet our famous visitors. I liked to meet as many as possible and frequently ended up in one-to-one conversations.

Cold War days

At that time the world was split into the two camps of the Cold War, and Eastern Europe remained behind the Iron Curtain. Even the thought of this ever changing looked impossible.

The Middle East was a major source of tension, then as now. There was the Iranian Hostage Crisis after the revolution, the invasion of Afghanistan by Russia and the second oil price shock of 1980 – which very few analysts would have expected to be the start of 20 years of low oil prices.

In England the two party system seemed about to end with the rise of a new centre party. The leader of the conservative students in Oxford, a chap called William Hague remembers the leader of the liberal faction as a major rival. His political career blossomed, mine was already over.

But then as now the world faced a serious recession. The 1980-2 recession was probably the worst until the current day. Yet we survived, although it made getting jobs difficult for graduates at the time. Indeed, the Thatcher Revolution succeeded in reviving the British economy, albeit after a very painful start for many of us.

But over 30 years the extent of change depends very much on where you are sitting. In places like Oxford or my home town Salisbury time has stood still. Russia and Eastern Europe are transformed beyond belief, and this peaceful transition is the greatest achievement of the European Union perhaps.

Middle East progress

In the Middle East the tensions remain. But some cities have made amazing progress. Dubai was a small town in 1980, now it is a global hub city with the world’s tallest building. Other countries have gone backwards.

So where would that leave us 30 years in the future when I hope to be among the survivors going back to my old university again? The lesson seems to be that some things do change and others change very little.

Geopolitically you would have to think a split between the USA and China might be the new axis of political power. It would be wrong to write-off America. We used to do that in 1980. China I am less sure about.

One of my young colleagues from Oxford went to Japan in the 1980s and came back after the market crash of 1990. Japan became very important but never surpassed the USA. China could yet just be a significant power rather than a bipolar giant by 2040. Its crash is yet to come, and all that glitters is not necessarily gold.

European Union

Europe ought to be far more important by 2040. The expansion and consolidation of the European Union is an understated achievement of the past three decades. If it continues and embraces Russia, to a greater or lesser extent, then this is a formidable economic and cultural power bloc, substantially larger than the US and second only to China in population.

Just as we used to write off the USA in 1980, today people overlook Europe. It is a very large, rich and well-educated continent. China has a very long way to go to catch up.

The Middle East should also enjoy dynamic change, if only because a fast growing, young population will demand it, and the oil and gas wealth should pay for it. The hope must be for a more peaceful outlook with the oil and gas reserves developed to the point that an economic transformation of the region occurs.

Cities like Dubai, Abu Dhabi and Doha are already feeling this phenomenon. It ought to become more widespread. Will it actually happen? Given that the world needs the energy resources of the region this has to be inevitable, one way or another.

Written by Peter Cooper

February 4, 2010 at 9:03 am

Can the Mideast power global growth if the UAE is in recession?

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The International Monetary Fund now says that the UAE economy contracted by 0.7 per cent in 2009, placing the second-largest Arab economy in recession, and told The National newspaper that ‘in 2010 overall GDP growth will be a bit flat’.

IMF regional director Dr. Masood Ahmed said: ‘Within that, we expect some continued contraction in Dubai and positive growth in Abu Dhabi. In 2010, we believe that the restructuring in the real estate side of Dubai will continue to be a drag on growth’.

Mideast forecast up

And yet at the same time the IMF is raising its forecast for economic growth in the Middle East from 4.2 to 4.5 per cent, one of the highest global growth rates outside China.

This is not the first time that the IMF’s growth projections for the UAE and the Middle East have failed to add up (see this article). Now is it not fair to assume that if the UAE is in trouble for 2010 then so is the rest of the Middle East?

Dr. Ahmed puts the IMF revisions for the UAE down to the Dubai World debt restructuring and the continuing drag of the local real estate crash on the national economy.

Its optimism about 2010 for the wider region is based on an average oil price of $76 a barrel. Forecasting oil prices is of course notoriously difficult but this appears to be a simple projection of current prices forward.

Oil price outlook

There are some big caveats here. What happens if the world goes into a double-dip recession? What happens if the liquidity fueled Chinese growth engine comes off the rails? Then oil prices could take a tumble and the IMF forecast again prove inaccurate.

Is there a better GDP growth estimate on offer? Probably not but it is well worth understanding the inherent problems and uncertainties surrounding such forecasts which may not be very good guides to the future in current circumstances.

To be fair the IMF is duty bound to make its prognostications. But it could at least try to explain how it can see the Middle East as a power house of global growth for 2010 when we are not going to see any growth in the UAE. Both statements are unlikely to be correct.

Written by Peter Cooper

January 27, 2010 at 10:28 am

Chanos explains his China shorting strategy

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Written by Peter Cooper

January 26, 2010 at 3:12 pm