March 14, 2006
Cheap MENA Markets: Get Yer Cheap Stocks Here
John Dizard offers an ironically timed article on the MENA markets in The Financial Times, telling the American investor that The Middle East offers fertile soil for value hunters (yes this is subscription only, get a fucking subscription you lazy git, best fucking paper out there).
Well, yes. Although given the timing I hardly imagine the US investor is going to overcome his fear of The Average Mohammed and buy MENA securities.
On the other hand, there are these cretins speculating on actual physical Iraqi dinars, so .... As an aside regarding the same cretins, I wonder how thy've handled the utter collapse of their dreams. Well, no matter, MENA securities and the Investor in You.
I have to say Dizard was brave to write this, or deeply insightful. Or both. Or neither. In any case, now is not the moment I would have chosen to go ahead with the following opening line: It has only taken about four years but Americans are beginning to notice, vaguely, that Middle Eastern stock markets have been on a double- or even triple-digit run.
I actually doubt Americans are beginning to notice any such things, as even in the investing class, I would say only about 40 percent are even aware that the MENA region has securities markets. This does remind me deliciously of the advice an American consultant was pimping in region to one of the Bourses c. 2002 regarding changes they just had to institute.
Without taking any of the idiots' advice, that exchange saw 02/03 up high double digits and has had similar performance ever since. (Yes, I have written about this before, in the context of development people pimping ridiculous ideas without understanding markets.)
In any case, Dizard notes
The first time the Saudi stock market (in which foreigners cannot invest) made the front pages in the US was when it was hit by a correction that started about two months ago. Considering the leverage hedge funds are using in a strained effort to make net annual returns in single digits, and given the new respectability of emerging markets and the willingness of Wall Street to come up with semi-plausible new instruments, and you would expect a series of Middle Eastern hedge funds.
Yes, you might. Except of course for the wee problem of market thinness and the amount of liquidity sloshing around. Dizard indicates there is but one - although frankly it is hard to tell what they really have.
But no. There is only one in the country, a $180m fund run by Emerging Markets Management of Arlington, Virginia. Launched in December 2004 with just $22m, last year it earned a net return of 59 per cent.
Added link. Frankly given the managers profiles, I doubt their portfolio is really MENA invested. I bet its Israel, Turkey, and South Africa invested, with a sprinkle of say Jordanian and Gulf markets.
Moving along, I rather liked the poke he takes at Hedge Funds (yes, I admit I lack the brilliance to be a Hedge Fundier)
A few other investors have taken advantage of Middle Eastern markets, including Firebird, a New York-based hedge fund group that principally invests in the former Soviet Union. But for all their self-image as bold and brilliant merchant princes, the hedgies take one look at cable news and run away from the region.
This is all part of the confused notion Americans have about their relationship with the locals. Spend lives and money on a war there, yes. Allow investment from there, no. Buy shares there? You can't be serious.
Indeed. In some ways one should commend the confused cretins at that fly-by-night Iraqi dinar speculation site cited supra, the ones who have hung on actually appear to be serious (and a brief review shows there are a few who seem to have a glimmer of understanding that if their bet is going to pay off, it will be with Iraqi assets). That is a fairly unusual attitude in re the MENA region - where my description of what I do is largely met by uncomprehending stares and followed by questions of whether I have plumbing (well literarally once "the amenities 'we' do" - I assure you, I have far more amenities than the fat McDo eating cow who asked the question).
Not, mind you this is incomprehensible, but.
Dizard rightly points out that actually
the region's stockholders can thank xenophobia for at least part of their profits. After 9/11 both America's government and (thanks to the Patriot Act) its institutions treated all money from the Middle East with great suspicion. They discouraged what had been a fairly active inflow of portfolio investment from the region. Even when Arabs could get past the tightened know-your- customer rules, they were put off by implied insults and intrusive airport screening.
Bloody hell, I have precisely the right kind of passport and name (I mean really how much more Anglo Saxon can I get?), and I get the implied insults and the like.
Never mind the relatively recent near disaster when a group of North African Bank CEOs (invited to the US by officials) were detained at the airport of entry for around 6 hours because some sub-literate screener found one of the executives "suspicious" (he had a beard). CEOs with a full schedule of meetings with Names at JP Morgan, Citi, (my idiots for some reason, probably bribery), Wachovia - the big American names in finance.
These stories build up.
And while yes there is the defensive American response "Everything changed after 9/11" I say bullshit - London has gone through bombings galore and one can generally pass through London on business without feeling as if one is within seconds of a gang-rape by cretinous border-guards. The same for most other "Money Centres" (Paris.... well, Paris is the excemption, but they're not really a money centre so fuck em.).
That is, it is entirely possible to have security (and effective security) without making the business traveller feel violated. London does it, there is no reason for the US' cretinous habits.
But I am distracting myself (other than to underline of course the side point).
So they changed their habits and kept their money in the region. At the same time the rise in oil prices accompanied by the decline in Iraqi production filled bank accounts in the area. Dubai and Beirut replaced Europe and the US as destinations of choice. Sleepy, undervalued stock markets took off. Saudi Arabia's locals-only stock market index has risen in value more than seven times from 2002; Dubai's has increased more than eight times, Egypt's more than 10 times, and Kuwait's by six times.
The initial acceleration in equity prices in 2002 fed on itself. "In most markets," says a British investor in the region, "you have two types of investor: momentum players and value seekers. Among the local investors in the region, there are only momentum investors, which gives lots of opportunity for finding value."
I have to say that Dizard's account here is a bit exagerated, and is very Gulf Centered. Of course it is the Gulf with the really stupid amounts of cash sloshing around. I would say, by the way, the idea that Dubai and Beirut replaced Europe as a destination of choice is silly. They have siphoned off some serious cash, however.
Well, give him credit, he continues:
That may be an overstatement, but not entirely. There is value to be found in the region, even now. Industrial companies, such as producers of cement and other building materials, can be found for price/earnings multiples in the low to mid teens, even though they have operating earnings growth rates above 20 per cent. At the same time, "service companies" - investment trusts by another name - can have P/Es of 40, 50, 80, or higher, based on portfolios of stocks in other investment companies whose prices are in turn inflated by momentum investors.
Sharif Atta, an analyst with Emerging Markets Management's Middle East fund, says: "Being a focused, value-based investor works well in those markets, which are very inefficient. For example, stocks in that region trade at an average P/E ratio of 25-26, with [projected] earnings growth for 2006 of 24 per cent. Our fund, in contrast, has stocks trading at an average P/E of 12, with the same earnings growth."
Well, my only added observation is on "projected earnings growth." Given the information in region, projected earnings growth should really be written "trend number one that I made up out of thin air."
Well, one can do things like this:
Harvey Sawikin, of New York's Firebird funds, says James Passin, his partner, tripled his money in Solidere, a Lebanese real estate company. "Now, it is our view that that market is dangerously overvalued." There certainly has been a detectable increase in Beirut's Blom index, from 639.35 in March of 2005 to 1,694.44 early this month. The actual high in the Blom was at the end of January, when it reached 1,934.21.
It takes some balls to triple one's money in the Rafiq Hariri real estate scam vehicle, but I guess if he got out.....
Even so, a Lebanese cement company, Ciman Blanc, trades at a P/E of about 11 and a price to book of 1.61 - considerably cheaper than cement companies such as Lafarge or Cemex and with a higher earnings growth. This would, apparently, illustrate Mr Atta's point about the values for selective investors.
And indeed that is right. There are a surprising number of companies like that scattered like confetti about the region (and need to be more I might add).
The problem is (i) finding the ones that are real, (ii) knowing how to achieve liquidity, (iii) actually achieving liquidity when needed.
If you're a portfolio investors.
If you're treating your investments more in a Private Equity sort of way, that simplifies things a bit, but then one gets involved in management. Potentially rewarding, I would say, if you like the idea of trying to add value in a region that is tough.
Khaled Majeed, an American born in Riyadh and formerly of the Arab Bank and Blakeney Management, last week launched a hedge fund specialising in the area in London. He says: "There are increasing numbers of bulge bracket US dealers setting up custody arrangements in the region. There is still no really good US prime broker for the region. Citigroup is a tiny bit ahead of the others. The ability to borrow stock (for short selling) is extremely limited and for the most part you aren't able to short in onshore accounts."
Short selling, either outright or as a hedge, would be a useful tool in the Middle East because there are frequent violent corrections, such as the one that started in Dubai last September. "Corrections of 25 to35 per cent are not uncommon,"Mr Majeed says. "The markets are basically driven by liquidity. For example, Jordan has been correcting since before Christmas and I still don't think it's cheap enough." The Dubai market, where the current regional correction started, is down by about 40 per cent from its peak.
Re short selling, it's also not technically legal to do in many of the markets. Oddly the regulators fear it - although being able to short would be a great way to bring in more outside cash and unwind unsustainable situations quickly. Take the Moroccan market. It effectively crashed in 99, but w/o a variety of means to short the market, plus only local investors, it took 4 or 5 years for that to unwind. And still the regulator won't allow anything more than a 5 and some odd up or down, which regularly halts the market for liquid issues.
Their argument - which is frankly stupid - is that most issues don't need it. Well, no kidding, because half your issues are ZOMBIES which if they trade you sit up and ask, "what the fuck is happening?!" Setting market standards by the Zombies is idiotic.
Continuing re the Amman market
Hundreds of thousands of middle and upper class Iraqis moved there as the security situation in Iraq deteriorated after the start of the war in 2003. They brought a lot of cash with them, which helped local business but also contributed to a momentum-driven overvaluation. "Companies such as the Arab Bank are valued for the psychological comfort they provide investors," says Fares Quba'a, an analyst with the Export Finance Bank of Amman. The Arab Bank is extremely conservative and carefully managed but with a price more than 30 times earnings it is hard to see the value proposition.
The value proposition for an Iraqi investor in Arab bank is of course, rock solid confidence. As compared to the hell that is Iraq. Plus they know Arab bank will go into Iraq when the civil war dies down.
Fortunately for the selective investor in the region, equity markets are not always highly correlated. The Egyptian market index still trades with a mid-teens P/E multiple. Kuwait, which has a more institutionalised market, and one that had a big crash in the early 1980s, has had less momentum-driven value inflation than the others./blockquote>
True, but the Egyptian market is a mess.
Kuwait, that's another matter, and the two quality Maghrebine markets are okay. I suppose the biggest Egyptian issues could be worse.
What is puzzling is on the other side, why more firms are not rushing to cash in on this. The number of IPOs ex Gulf has been trivial, yet the valuations have been excellent.The series of market corrections in the area probably has a few more months to run. That said, the secular shift of wealth to the region, and the acceleration in local development, will continue. If you're able, or willing, to do the analysis of the underlying operating companies, and disregard the speculative profits in the income statements, there is value to be found.
I agree. However, the problem is that doing the analysis of underlying operating companies in this context is a non-trivial pain in the ass.
I don't expect US flows.
Maybe a bit of institutional, but not much.
(*: Of course one of my fondest memories is standing up before a Board with my spiffy powerpoint explaining why they should not be worried that the prior year's 200 percent growth projection for the "Star of the Portfolio" was undershot a wee bit. When I say 'wee bit' I mean it bloody tanked. The best part of this experience, which in retrospect still brings me joy to my heart, is my Chairman then standing up to extemporaneously destroy the crafty and on the surface, potentially convincing explanation of the fiasco, the subsequent shouting match between Board members and Chair, and finally me cheerily, in a moment of silence, saying "Well, next slide then." It was a thing of beauty.)
TrackBack URL for this entry:
Is there any way that someone significantly poorer(and less evil) than a hedge fund could get in on some of this MENA goodness or does one need more than a decade of regional experience to avoid paying $100,000 for a flea market rug and liking it?
Posted by: Anon at March 14, 2006 07:08 PM
There are, but what are we talking about?
Lower end HNW?
Posted by: collounsbury at March 14, 2006 07:59 PM
One thing that struck me doing some reading in my new at-least-until-they-see-my-writing employer's magazine about the Beirut Stock Exchange (BSE, great acronym for a stock exchange in a bull market) was how frankly they talked about insider trading and how it was unlikely to stop.
(also this bit, from an interview with the BSE's chairman)
E Is there a problem with insider trading?
I will be honest with you. It’s very difficult for us to control insider trading.
E In the absence of a CMA[Central Monetary (or Monitoring?) Authority, I think]?
We are very limited. We don’t have the right to question investors on their trading. They can tell us it is none of our business. What can I do? We have neither the law neither the authority. Sure, we can ask the financial institutions to explain themselves if we feel there is any financial manipulation, but the broker can turn to me and tell me he received an order to buy from his client. Can he refuse his order?
Posted by: Tom Scudder at March 15, 2006 12:46 AM
Posted by: collounsbury at March 15, 2006 12:49 AM