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Any investors who think they’ve done well by investing in Europe or Japan this year should take an envious look at the Middle East. Returns from anywhere else, however good, pale in comparison.
The Saudi market is up nearly 100%, Abu Dhabi is up 80%, and stocks in Dubai have soared an incredible 166%. None of this should come as much of a surprise. The huge rise in the oil price over the last year has meant that cash has been pouring into Middle Eastern pockets, and hence into markets (they’ve had $300bn in oil revenues in 2005).
But surprise or no surprise, there are “understandable concerns that valuations in these markets have reached bubble-like proportions”, says Stephen Roach of Morgan Stanley.The Saudi stock exchange is up eightfold since 2000 (making it the world’s biggest emerging market) and now trades on a p/e of nearly 50 times.
Can that really be sustainable? Unlikely, says John Waples in The Sunday Times. Given the current ratings of these markets, it rather looks like they’ve had their fun. But that makes the real question now, where will the petro-dollars go instead? In past oil booms, a significant percentage of them have been recycled into dollar-denominat¬ed assets. But this time round, thanks to political tensions and concerns about the stability of the dollar, the reflow back into dollars is “largely missing in action”, says Roach: Opec holdings of Treasuries have actually fallen since February.
So where will the money go instead? Middle Eastern investors are soon likely to start looking for higher-growth opportunities in China and India, says Waples, so look for some action there. But some of the cash may also come Britain’s way. Mergers and acquisitions are already buoying the FTSE, but there may be more to come. Indeed, says the FT, the Dubai purchase of P&O at 24-times earnings could well be “a harbinger of things to come”. There are many reasons to be negative on the UK market in 2006, but if the petrodollars really start pouring in they will count for little.
Published in Stock markets
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Annunziata Rees-Mogg
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