DUBAI: A sharp rise in trading turnover shows money is pouring back into Middle Eastern stock markets, after a year in which the global financial crisis and political turmoil in the Arab world kept most markets depressed.
Analysts believe the bulk of the recent buying is by local investors seeking short-term profits, rather than by foreign funds and other long-term institutional investors.
They say the rallies could be cut short if the global financial environment worsens again — for example, if the euro zone debt crisis flares up once more — or if there is a geopolitical crisis such as conflict with Iran over its disputed nuclear program.
Nevertheless, the explosion in trading activity is good news for Middle Eastern brokerages that have struggled for several years with low demand for their services, and it could buoy asset markets and business sentiment across the region.
"The liquidity is here to stay for the near term at least, though global risks could still make people cautious," said Amer Khan, fund manager at Dubai-based Shuaa Asset Management.
In Saudi Arabia, daily trading volumes have averaged 311 million shares so far this year, up 122 percent from last year’s average. Average daily value traded has climbed 109 percent. This has helped to boost the main stock index by 6 percent this year, following a decline in 2011 of 3 percent.
Monday’s volume in Dubai was the highest since April last year, although most of it was short-term trading of small-cap stocks favored by local speculators. The index, which sank 17 percent last year, is up 13 percent so far in 2012.
Even Egypt, which remains vulnerable to unstable domestic politics and the threat of a currency crisis as the country’s foreign reserves shrink, has seen trading volumes rise by some 50 percent from last year’s levels. The index has rebounded 38 percent after last year’s 49 percent tumble.
The recovery of Middle Eastern markets is partly due to a global revival of investor sentiment; rising equities overseas have encouraged Arab investors to return to their markets.
A monthly poll by Bank of America Merrill Lynch, released this week, showed a dramatic improvement globally in investors’ views on market liquidity conditions, which hit their highest reading since June. A net 44 percent of investors were overweight global emerging markets, up from 20 percent in January — the second biggest jump since 2001.
But there are also specific local factors behind Middle Eastern markets’ strength. In Saudi Arabia, strong economic growth and high oil prices are combining with expectations for economic reforms that could boost equities.
Analysts believe authorities may open the market to direct foreign investment this year, while a long-awaited law facilitating mortgage lending may be passed, spurring the home loan industry. Also, the consultative Shoura Council proposed imposing a tax on undeveloped plots of land, local media reported this month, which could push money out of unproductive land speculation into real estate development or other asset markets.
"Local fundamentals are strong, money is flowing in from other asset classes and the increased demand for equities is likely to continue," said Asim Bukhtiar, head of research at Riyad Capital.
In Dubai, the slumping real estate market continues to hurt earnings at property developers and banks; Emirates NBD, Dubai’s largest bank, posted a 62 percent decline in fourth-quarter net profit on Wednesday.
But the stock market’s rally appears to be based on a sense that valuations have become cheap — the index hit a seven-year low early this year — and signs that authorities will act to limit the damage to indebted companies.
Emirates NBD revealed on Wednesday that the United Arab Emirates finance ministry had given it a 2.8 billion dirham ($762 million), eight-year loan at below market rates to help it take over a struggling Islamic bank last October.
And in Egypt, investors are looking beyond immediate political and economic uncertainties to the prospect that in a few months, the country may have a democratically elected president, complementing the new parliament which was elected last month.
"We are seeing a period of stability after successful parliamentary elections and with a planned presidential vote due in the coming months, Egypt is seen to be moving forward in its political development," said Mahmoud Othman, trader at Cairo Capital Securities.
On Monday, a deal was announced under which France Telecom would buy out most of the shares held by Egypt’s Orascom Telecom Media and Technology (OTMT) in their jointly owned telecommunications operator Mobinil. Reuters calculations indicated the deal would cost around $2 billion.
Tarke Abaza, trading manager at Naeem Brokerage in Cairo, said he could sense a "very positive vibe in the market following OTMT’s deal due to the current quietness in the political scene." –With additional reporting by Yasmine Saleh