DUBAI: After a week of dull trading, Gulf stock markets may regain some direction in the coming week in response a policy decision by the US Federal Reserve and developments in the euro zone debt crisis.
"The next two weeks are critical — we have the quantitative easing announcement in the US and the Greek debt talks in Europe; these things can take the market in either direction," said Joe Kawkabani, chief investment officer for equities at Franklin Templeton Investments (ME).
Late in the global day on Wednesday, the Fed was expected to conclude a policy meeting and announce a fresh effort to stimulate the US economy, possibly by rebalancing its $2.8 trillion portfolio of bond holdings to weight them more heavily towards longer-term securities. Any positive reaction by global markets would almost certainly buoy the Gulf.
Meanwhile, Greece was set to outline more austerity measures late on Wednesday to secure a new installment of its international bailout and avoid running out of money next month. While success in obtaining the money would not end investors’ concern about the euro zone crisis, it could ease pressure on markets around the world for the short term.
"The improvement in sentiment across the MENA (Middle East and North Africa) region should be supported by the seasonal increase in trading activity in the run-up to Q3 earnings results," said EFG-Hermes in a research note.
However, it added that MENA markets would probably underperform developed and emerging markets during any rally, because many foreign investors in the Gulf are inactive and trading volumes are extremely low.
"Volumes are ridiculous — there is a complete lack of interest for the market and the volatility is low," said Sebastien Henin, portfolio manager at The National Investor.
"Unless we see something significant from Europe, or change in terms of macro indicators, it will be trading sideways, with low liquidity and volatility," he said of Gulf markets.
Henin added, "We’re reaching historic lows in valuations for most countries, even those that used to be expensive like Saudi and Kuwait. But it’s not enough to catch foreign investors’ interest. And compared to other emerging markets, it’s not the best buy of your life."
Local funds may continue to focus on companies which have exposure to growth in Gulf economies, which are backed by high government spending, and have relatively little dependence on the global economy. This means agriculture and the food sector, telecommunications and construction stocks.
"Taking a medium-term view, we have to look through the volatility and invest in sectors and companies where we find value," says Franklin’s Kawkabani.
"In our medium-term strategy, we favor anything related to the domestic economy because we don’t have a lot of visibility over what’s happening globally, and we have a better understanding and confidence in regional macroeconomic dynamics."
Many regional funds are underweight on petrochemicals in Saudi Arabia and Qatar because of the vulnerability of oil prices to a global economic slowdown, though petrochems remain a buying target for some retail investors.
Egypt’s stock market was dominated by swings in the shares of Orascom Telecom this week. The shares surged almost 13 percent in two days after an Egyptian newspaper said Shearman & Sterling LLP, a law firm hired by the Algerian government, had valued Orascom’s Algerian unit Djezzy at $7 billion. But Orascom fell back 5 percent on Wednesday after an Algerian source told Reuters the Telecommunications Ministry had not yet received any valuation for Djezzy.
In the coming week, this issue looks likely to fade and banking stocks, which have underperformed the market this year, may take the driving seat after the government announced a reshuffle of the top executives of several of the country’s state banks.
Traders said the changes were encouraging. Key positions at state-owned National Bank of Egypt, the biggest, and Banque Misr were unchanged, but other major institutions were affected.
"We have had positive news on changes in the leadership of the public banks and the new chairs are all people who are well accepted in the sector," said Hisham Metwalli, a trader at Arab Finance Brokerage.
Commercial International Bank and National Societe Generale Bank, two of the most closely watched institutions, are both down around 50 percent since the start of this year, compared to the benchmark index’s loss of 39 percent.
Ashraf Akhoukh of CIBC brokerage said the reshuffle was positive for the state banks, but predicted the impact on the broader market would be minor.
"There is minimal international involvement (in Egypt’s market) and there is no catalyst to improve retail sentiment."
Kuwait’s market is plagued by political uncertainty and discontent with the newly formed Capital Markets Authority over regulations covering investment firms, many of which are still to be implemented.
A mass protest against corruption was due to be held late on Wednesday with some protestors calling for the resignation of Prime Minister Sheikh Nasser al-Mohammad al-Sabah.
Some traders said the market could rise moderately if Sheikh Nasser does resign, because it could ease political tensions in the short term at least.