September 26, 2005
Gulf & the MENA Region Finance, Booms & Inefficiencies
Our friend and sometime contributor Waterboy draws attention to something obvious to all involved, and yet an item that remains out of control: overliquidity in the Gulf region and the consquent mad asset price boom in the Gulf. His observation is spot on, that there is
there's too much cash chasing too few investment opportunities in the region; too little oversight, regulation or transparency; too much exuberance - bear in mind, as Japanese bank Nomura pointed out, that Saudi Telecom's market capitalisation of US$74bn is worth more than BT (US$35bn), AT&T
(US$15bn), SK Telecom (US$15bn), and Telekom SA (US$9bn) combined - and far too many unsophisticated investors who think that having the names of a couple of ruling family members in the IPO prospectus is a valid alternative to a business plan - or, for that matter, an existing business.
No doubt about this at all. Some conversations I had over the past week painfully illustrated that. This aside, a key point of disequilibrium is the degree to which despite the asset valuations in the Gulf being absolutely looney to the point of surreal, the money is not flowing within the region to a reasonable degree.
(cross posted from Lounsbury - 'Aqoul)
There is very clearly far too much money chasing too few assets (recalling the Gulf economies remain heavily dominated by State firms and closed shop monopolies). Superficially given the degree to which "Arab market(s)" and "the region" one would expect that money to begin prospecting the neighboring ex-GCC markets more. Superficially, of course. But one thing one learns from being in investing in the region, for all that the business plans love to cite to the total population of the region as the market, to assert various things about "the Arab market" and the "common language, culture" etc. (I just came away from reading a prospectus that said just these things), the reality is the markets are terribly fragmented and in fact the flows are difficult to achieve.
Of course, no doubt making things worse, among the national markets that make the most sense by fundamentals (above all ability to acquire potentially growable assets at attractive valuations) in the region are the two small North African markets - Tunisia and Morocco - but which also have a very divergent culture, business style, etc., that appears to put off the Gulfies. Lebanon and Egypt are certainly far easier for the Gulfies in terms of language, culture and similar styles of doing business, however their severe issues in terms of near term stability (regardless of the idiotic posturing in public) and in Egypt's case bloody pain in the ass bureaucracy are severe brakes.
Solutions? None are terribly obvious, other than the same old improve the bloody climate for moving money.
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How much back-and-forth asset-flow is there with India, which has a lot of links in terms of the skilled population in the Gulf & some historical trade-links going way back? Aside from the massive remittance-flows, that is.
Posted by: Tom Scudder at September 26, 2005 01:01 PM
I keep wondering whether part of the plan is for the state-controlled companies which are sucking up all this cash to convert it into hard assets through aggressive acquisitions. In the UAE, the Taqa and Aabar IPO prospectuses both gave the impression that that was the intention - but both have yet to live up to their promises. If that does come true, though, it means that these IPOs worked like a stealth tax - sucking up money from the local population for the state to then spend on projects of its choosing.
Anyway, sorry for the absence - I keep meaning to write something else for 'Aqoul but I have deadlines coming up which are pretty all-consuming.
Posted by: waterboy at September 26, 2005 01:59 PM
I have no idea, I don't normally deal with the Gulf to be frank. Impressionistically, I suspect that flows of Gulf capital towards India, via vehicles such as the emerging class of larger private equity vehicles and funds of funds are increasing. I personally have some connexion to a group that is raising a fund of funds in the Gulf for just that aim. I suspect they will be successful.
Actually I had not thought of the disguised tax angle, but you're quite right. Sketchy use of funds, flows to essentially state institutions....
The Gulf has a lot of nasty ingredients for a real financial sector train wreck, and with the ongoing liquidity, I should expect it will not be soon, which suggests it also will be quite nasty indeed. Unless the authorities have more discipline than I give them credit for.
Posted by: lounsbury at September 26, 2005 02:31 PM
Can they short-sell in those equity markets?
Posted by: matthew hogan at September 26, 2005 05:03 PM
As a general matter, no.
Posted by: The Lounsbury at September 26, 2005 05:11 PM
"Can they short-sell in those equity markets?
Posted by: matthew hogan at September 26, 2005 05:03 PM
As a general matter, no."
I would suggest that that is another factor favoring market-indiscipline. Large funds couldn't short sell the late 90s boom in US markets, causing undisciplined growth in value. Or so I recall.
Posted by: matthew hogan at September 27, 2005 10:15 AM
Well, perhaps, but let's be practical. first, the concept of shorting is not well developed outside .... developed markets, and as the recent equity booms showed, shorters can be overwhelmed by the herd.
As such while shorting can improve market efficiency, it's ... irrelevant to this problem. Even assuming a strong market infrastructure, the amount of liquidity flowing in is enormous.
Nope, shorting is a "nice to have but not really relevant" thing.
Better would be to have decent avenues to channel liquidity to other assets.
Posted by: The Lounsbury at September 27, 2005 07:53 PM