November 2008

THE GULF: A new light shines on Sharia

European fund managers may not always trust Gulf markets. But after recent carnage Middle Eastern investors are more wary of Western finance too. Angele Spiteri Paris gauges feelings among asset managers ...   The size of Middle Eastern markets – with GDP of over US$9bn – means they have great investment potential. However, a lack of transparency and corporate governance make it a challenge for Western fund managers to participate.
But if index providers like MSCI Barra start to include Kuwait, Qatar and the United Arab Emirates (UAE) in their emerging markets indices, the region may have to comply with global standards that fund managers are accustomed to.

According to Nigel Sillitoe, executive officer, Middle East, for Thames River Capital, the Gulf capital markets are still not up to scratch. “Structures and governance are getting better, but they’re still a long way off from what fund managers expect in the West,” he says.

Several industry players agree that the levels of corporate governance and transparency are far from those seen in developed markets. “The lack of transparency is always challenging,” says Graham Elliott, head of Middle East at Barclays Global Investors. Partnerships with local markets are needed to help them develop greater transparency across the region.

Vincent Camerlynck, global head of business development of BNP Paribas Investment Partners, says: “Despite a tremendous growth over the last few years, the GCC [Gulf Cooperation Council] markets have not yet reached the standards of other global markets. As these economies continue to expand and these markets increasingly open themselves to the global investment community, their importance and attraction will continue to grow.”

But Rami Sidani ââ?¬Â¨head of investments, Middle East and North Africa, Schroder Investment Management, says: “These are very nascent markets and considering the fact they have only been around for a few years, the development has been exponential.”

Insider information
One source, who wished not to be named, says the Kuwaiti market, as an example, is all “smoke and mirrors”. Apart from Saudi Arabia, it represents the largest GCC country by market capitalisation and therefore should be the most liquid.

“They don’t have a regulator in Kuwait and overall it’s very bureaucratic,” the source says. “Although it is supposed to be the most liquid market in the GCC region, the local market is manipulated by big local families who can actually move share markets.”

Meanwhile, in Dubai the regulators are making efforts to crackdown on fraudulent behaviour, which could increase confidence in the market. This follows news of leading industry figures being brought up on charges of bribery and corruption.

Although certain regions remain quite challenging, others have taken steps to be more open to foreign investors. In August this year, Saudi Arabia’s stock market regulator – the Capital Markets Authority (CMA) – announced it would allow foreigners to buy shares listed on the Arab bourse through swap agreements.

This means that Saudi investors can now enter in swap agreements with both institutional and retail investors who are not resident in the Middle East. This will see Saudi investors retaining legal ownership of the shares while transferring economic benefits to foreign investors.

Historically, the Saudi Tadawul, which is also the Middle East’s largest bourse, had been closed to non-residential investors. Although the investment is still not direct, this is a great leap forward.

One cannot deny that the move by the Saudi Arabian authorities to open the market was positive; however some have a few reservations. Oliver Bell, head of emerging markets at Pictet Asset Management, says: “Initially there was euphoria in the local market, thinking capital was going to

simply flow in, but in reality you have to jump through a lot of hoops with the brokers and this can be a lengthy process.”
Some also argued that the CMA does not have the capability to cope with large foreign inflows, since it has only been active for a couple of years.

Sanity returns
As the financial crisis takes hold of the world its effects seep into almost every corner of the globe, including the Middle East. Shirish Saraf, president and founder of Samena Capital, says: “Until June this year, the Gulf capital markets had been defying the laws of gravity. We’ve seen some sanity come back in the last few months and there is further pain to be felt in the stock markets.”

The last few months have seen Middle East stock markets take a battering, with each registering slump after slump. The first two weeks of October proved particularly harsh.

In the second week of the month the energy-rich Gulf opened the week’s trading with sharp downturns. The Dubai Financial Market dropped 6%, while the Saudi Tadawul dropped a further half percent after dropping almost 6% the previous Saturday.

Other Gulf stock markets that posted troubled news were the Kuwait Stock Exchange, down 2.9%, the Abu Dhabi Securities Exchange, which declined 4.2% and the Doha Securities Market that lost 7.4%.

But amid the carnage, the investments that have been holding their ground a little more are those that are Sharia compliant (see box).   ©2008 Funds Europe

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