Dr Fadi Khalaf, Secretary General, Arab Federation of Exchanges (AFE) gives us an overview of the Arab region.
Why do business in this region?
The Arab region, with a GDP of $2.57 trillion and with a population of 392 million, is one of the most youthful regions in the world. 28% of the population is aged between 15 and 29, and the region has a median age of 22 years compared to a global average of 28.
The region holds more than 43% of the world’s total proven oil reserves, and more than a quarter of the world’s total proven gas reserves.
Market Structure of the Arab Federation of Exchanges (AFE) Members:
- 18 Arab Exchanges, 4 CSDs, 34 Financial Services Institutions (Affiliated Members), with $1,117 billion market capitalisation and $420 billion trading value in 2016.
- 9 of the Exchanges are owned by the public sector, 5 are joint stock companies, 4 are in process of privatisation and more than 1,500 companies are listed on those exchanges.
Challenges facing the Arab Exchanges:
- Low Turnover Velocity with an average of 37.62%.
- High dependence on oil prices.
The reasons lying behind the lack of liquidity on the Arab markets are mainly due to the absence of: covered short selling, securities borrowing and lending, derivatives and practically an absence in market making.
- Very good fundamentals: in this region you can find several companies benefiting from a PE ratio below 8, price to book value below 1, with a dividend yield higher than 5%. The average PE Ratio for the S&P 500 Index Companies is higher than 26.
- Most Arab countries have their local currency pegged to the US dollar.
- After having the UAE, Qatar and Egypt classified as Emerging Markets, the Kingdom of Saudi Arabia is in the process of being upgraded to an Emerging Market in the near future.
- Abu Dhabi Securities Exchange recently allowed Short-selling. Other Arab exchanges may follow suit.
- Several Arab exchanges are now considering adding derivatives to their markets.
- Most Arab stock exchanges are moving to T+2 settlement cycle (for ease of operations with international counterparts).
- The XBRL (eXtensible Business Reporting Language) is already implemented in Saudi Stock Exchange, Dubai Financial Market, Abu Dhabi Securities Exchange and many other exchanges are now in the process of acquiring the XBRL system.
- Most of the Arab exchanges are already open to foreign investors; more flexibility will come in the next couple of years.
- Most Gulf economies are moving towards diversifying their economy sectors, trying to rely less on oil resources.
Is it the time to invest in Arab Exchanges?
- It goes without saying that Arab markets are highly correlated to the oil price, which is now stabilising.
- It’s been proven that Arab markets have also been highly correlated to US markets, except when the price of oil is falling sharply. Expectations are still positive on US markets at least until May 2017.
- We are observing low correlation between the geopolitical situation in the region and Arab markets, due to the fact that the limitations of military conflicts are already known.
If an investor is looking for good fundamental opportunities and is assuming that the oil price will be stable or positive, and has good expectations on the US market, it might be a good opportunity for them to monitor Arab markets.
Find out more about the AFE here.