* Forward PE ratios suggest Saudi stocks still cheap
* Rising oil prices, bank lending buoy market
* SABIC triggers reverse head & shoulders pattern
* Real estate may mean Dubai rally on shakier ground
* Egypt may consolidate on Q4 corporate earnings
By Nadia Saleem and Patrick Werr
DUBAI/CAIRO, Feb 22 Leading Gulf stock
markets have risen so rapidly in the last several weeks that
some investors are wondering if a pull-back is in store. But
valuations suggest the rallies may have further to run, fund
The benchmark Saudi Arabian index rose above the
psychologically important 7,000 point mark in heavy trade on
Wednesday to its highest level since October 2008. Since the
market peaked just below 7,000 points in 2010, this area would
be a logical place for momentum to fade.
"Given that the rally is up about 19 percent from the recent
trough (in October), I think there is room for a small
correction before higher levels can be attained," said Sleiman
Aboulhosn, assistant fund manager at Dubai-based Al Masah
But he conceded that valuations did not indicate any need
for a pull-back. "I don't think that valuations are stretched --
the only short-term threat is technical," Aboulhosn added.
Fund managers said Saudi stocks were trading at roughly 12
times this year's projected corporate earnings, compared to 18
times at the end of 2010 and 23 times at the end of 2009.
"You can find a lot of opportunities in the Saudi market --
valuations look appealing in the petrochemical and banking
sectors, but selectively," said Fadi Al Said, Dubai-based head
of investments at ING Investment Management. "The main
opportunities can be found in the mid-cap level."
Heavyweight petrochemical and banking stocks have rallied
hard in recent days as investors have shifted focus from
small-cap speculative stocks into companies which are traded
more in response to fundamental economic factors.
"We like banks on valuations and earning power and robust
balance sheets. There are clear signs that balance sheets are
starting to grow again," said Al Said.
Saudi bank lending to the private sector rose 10.7 percent
in November, its fastest growth rate in 31 months. Growth
remained high at 10.6 percent in December, according to the
latest official data.
Meanwhile, rising global oil prices are boosting shares of
Saudi petrochemical firms, because they have access to cheap
Saudi Basic Industries Corp, the world's largest
chemicals producer by market value, rose more thn 5 percent this
week to above 100 riyals per share. Technically, it triggered a
bullish reverse head & shoulders pattern formed by the lows
since last August, and pointing up to the 110 riyal area.
The Dubai market's rally is more vulnerable, partly because
local companies remain threatened by weakness in the real estate
industry, where property prices and rents have not shown clear
signs of recovering, fund managers said. The stock index
is up 19 percent year-to-date and at its highest level
since May 2011.
"Dubai looks closer to stalling and moving into a pull-back
lower, or a sideways consolidation," said Bruce Powers,
Dubai-based head of research and analysis at Trust Securities.
"The rally in Dubai has been very strong with the index
breaking through a number of potential resistance levels with
little hesitation. It isn't happening yet, but at some point
possibly very soon, profit-taking will increase and move the
However, fund managers said stocks in the United Arab
Emirates were trading at about 10 times this year's projected
earnings. That is more expensive than 9.6 times for Dubai at the
end of 2011 and 8.9 times at end of 2010; for Abu Dhabi, the
multiples were 7.9 and 9.6. But it is still not high by
historical standards -- Dubai was around 14 times at the end of
2007, before its property slump.
"PE multiples point to the fact that markets are still
undervalued, but this is not news," said Al Masah's Aboulhosn.
"Regional multiples have been very attractive for a long
while now, but the markets lacked a catalyst to trigger buying
as we delved deeper into the bear market during the course of
2011. Optimism is returning now, but the overall situation in
the GCC (Gulf Arab markets) remains somewhat fragile."
Egyptian shares may move sideways next week as the market
consolidates after a rally that has thrust the benchmark index
up by almost 40 percent since the start of the year,
The index has soared since early January, when the
government announced it was seeking a much-needed support
package from the International Monetary Fund and after the
successful conclusion of parliamentary elections. In the next
few weeks, however, companies will announce their fourth-quarter
earnings, and these could dampen the mood.
"I think on the results you might get a big bath," said Mike
Millar, head of research at Naeem Brokerage.
"It's been such a bad year. Companies might take advantage
of that to have a clean-out at year-end to help the results for
next year, to clean out all of the rubbish to have a clean base
going into 2012.
"You shouldn't be surprised to see that the fourth quarter
is pretty bad across the field."
The market is waiting for a date to be set for a
presidential election, now expected to take place as early as
May. The fixing of a date would be another sign that Egypt's
transition to democracy was on track and could give a boost to
share prices, analysts said.
Potential political threats to the market, however, include
a looming verdict in the trial of ousted president Hosni Mubarak
and legal challenges to parts of the voting process in the
election that chose Egypt's newly convened parliament. Political
commentators say a verdict against Mubarak that was deemed too
soft by the public could provoke fresh street protests.
The government has said it expects to sign a $3.2 billion
emergency loan agreement with the IMF next month, but it will
have to convince the Fund that it is determined to bring its
budget deficit under control and persuade the Egyptian public to
accept painful economic reforms needed for this, such as changes
to subsidy systems.