Cheapest Gulf Stocks May Get Cheaper as Oil Retreats

By Michael Patterson

Nov. 26 (Bloomberg) -- Stocks in Dubai, Abu Dhabi and Saudi Arabia that more than doubled the past four years are unraveling as lower oil and real-estate prices weaken economies in the biggest crude-producing region.

The MSCI GCC Countries Index of 115 gulf companies, already down 57 percent in 2008 through yesterday, may drop 20 percent in the next six months, said Jeff Chowdhry, who helps oversee $150 billion at F&C Asset Management. Ten months after the index traded at 20 times reported earnings, Emaar Properties PJSC, the Middle East’s largest developer, trades below 3 times profit; Emirates NBD PJSC, the U.A.E.’s biggest bank, is valued at 5.

Now some of the world’s biggest emerging-market investors say valuations may fall further because prices don’t reflect the collapsing property market and 66 percent tumble in oil since its July 11 record. Templeton Asset Management’s Mark Mobius says stock markets in South Africa and China are more attractive.

“If anyone’s got any Middle Eastern stocks I would be taking this opportunity to sell,” Chowdhry, F&C’s head of emerging-market equities, said in an interview from London. “It’s a combination of a deteriorating fundamental outlook, bubble valuations which are just starting to unwind in real estate and banks, plus liquidations in funds.”

Cheapest Shares

The Dubai Financial Market General Index of 29 companies in the emirate surged 493 percent from 2004 to 2007 as residential property prices climbed four-fold in the last five years and a 195 percent rise in oil boosted government spending. The Abu Dhabi Securities Exchange General Index jumped 159 percent during that period, while Saudi Arabia’s Tadawul All Share Index gained 149 percent.

All three indexes tumbled more than 40 percent this year and traded this week at the cheapest levels on record compared with earnings, cash flow and net assets, according to data compiled by Bloomberg.

The Dubai index today added 0.5 percent at 11:21 a.m. London time, while the Abu Dhabi gauge declined 1.7 percent. The Tadawul index lost 0.9 percent.

Emaar Properties, the second-worst performer this year in the Dubai index, is valued at 2.4 times earnings after falling 83 percent in 2008. Dubai-based Emirates NBD trades for 5 times profit after a 71 percent retreat.

The Dubai index’s 69 percent decline in 2008 through yesterday was the steepest among benchmarks in the world’s 50 biggest equity markets. China’s CSI 300 Index lost 66 percent, while India’s Sensitive Index dropped 57 percent.

Forced Selling

Templeton’s Mobius said Nov. 17 that he’s “aggressively” buying in other emerging markets such as China and South Africa and it’s too early to go “bargain hunting” in the Gulf.

“We really didn’t like the Middle East because it was up too high and there were so many other bargains around,” Mobius, who manages about $24 billion of emerging-market assets as executive chairman at Templeton, said in an interview from Johannesburg.

While the deteriorating outlook for profits caused the retreat in Gulf stocks at the start of the year, this month’s 20 percent decline in the MSCI GCC index is mostly the result of sellers who dumped shares to repay loans, according to Oliver Bell, the head of emerging-market specialist equities at Pictet Asset Management, which oversees about $91 billion.

Arabtec Holding Co., the construction company building the world’s tallest tower in Dubai, has tumbled 42 percent this month and traded for 1.8 times earnings this week, the cheapest since Bloomberg began tracking the data in 2005.

Growth Slows

“It’s left some companies where the fundamentals really haven’t changed that much and yet they are trading at ridiculous valuations that give you a once in a lifetime opportunity,” said Bell, who runs Pictet’s Middle East and North Africa equity fund in London. Bell isn’t buying yet, because “at the end of the day you’re catching a falling knife,” he said.

Middle East economic growth will slow to 5.3 percent next year from 6.1 percent in 2008, the International Monetary Fund estimates. The IMF expects China’s economy to grow at an 8.5 percent pace next year and India to expand by 6.3 percent, according to the Washington-based fund’s World Economic Outlook.

Property prices in Dubai fell 4 percent in October, and declined 5 percent in Abu Dhabi, signaling a “turning point” in the markets, London-based HSBC Holdings Plc said in a Nov. 12 research note.

HSBC and London-based Lloyds TSB Group Plc, two of the largest banks operating in the U.A.E., restricted lending in the region this month. Dubai’s two largest mortgage lenders, Amlak Finance PJSC and Tamweel PJSC, will be taken over by a government-owned bank.

‘Property Bubble’

“The property bubble has just recently burst and the impact of that on psychology is going to take place here for a few more months,” said Cliff Quisenberry, who advises hedge funds at University Place, Washington-based research and consulting firm Investment Frontiers Research LLC.

Abu Dhabi, which owns nearly 8 percent of the world’s proven total oil reserves and runs the largest sovereign wealth fund, may cushion the region’s economy from losses at banks and real-estate developers. The emirate won’t allow Dubai’s state- owned companies default on debt payments, Abu Dhabi Commercial Bank Chief Executive Officer Eirvin Knox said this month in an interview in Abu Dhabi.

F&C’s Chowdhry says oil’s tumble from a July record $147.27 a barrel to $50.77 yesterday may hamper the ability of governments to rescue developers and construction companies while they shore up financial companies such as Amlak.

‘Daunting’

Middle East oil-producing nations excluding Kuwait may post “sizeable” fiscal and current account deficits if oil averages $50 a barrel next year, Citigroup Inc. said in a research note last week. Economic challenges facing the Gulf nations are becoming “increasingly daunting,” the New York-based bank said.

Lenders in the region are competing for local deposits after overseas investors pulled money, said Fahmi Alghussein, an executive director at New York-based Morgan Stanley. That’s pushing up interest rates on certificates of deposit and luring cash from stocks, Alghussein said.

“Banks are chasing depositors for funds in the region,” said Alghussein, who runs Morgan Stanley’s Middle East equity sales and distribution from Dubai. “That’s pushing money out of equities and other asset classes. As long as you have that, there’s no catalyst to invest in equities.”

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.