Local Equities Pick Up Pace

As talks of a Euro collapse and spiralling contagion reaches a feverish pitch, Riad Meliti, the CEO of Arqaam Capital remains unfazed. He believes that if the last remaining issues of the Eurozone are resolved, the world will be at the back-end of the Euro crisis.

If not resolved, “it could, of course, cause bigger problems.

“But four years are enough. The Euro resolution in whatever format needs to be put behind us. If the European Central Bank (ECB) becomes more proactive it could hasten the deleveraging of banks, while reducing the refinancing risks of companies around the world.”

Unlike most analysts who fear the economic fallout from the recent geopolitical upheaval in the Middle East, Meliti says that although the Arab spring had led to risk aversion in the short-term, the long-term prospects of implementing a consensus government could be significant, since “democracy breeds stability” and is an easier sell on a global market platform.

What about India, where growth rates have fallen to seven-year lows and China, where Q2 2012 growth is less than seven per cent? Meliti is unperturbed, “Even if growth rates in emerging economies fall one per cent, these markets are still growing substantially.”

Instead of focusing on the problems, Meliti says that he’s looking at the opportunities. “For instance, the MENA market has over 1,000 publicly listed stocks, of which there is active research on only around 130. With such depressed valuations, bottom-up fundamental analysis has tremendous scope.” He says that despite equity volumes collapsing by 80 per cent in the last three years, the stock market in the region could double within a 24-month horizon.

He should know; Arqaam Capital has seen volumes grow by 150 per cent in its brokerage business over the last 12 months.

Meliti is also of the opinion that development of the corporate bond market in the region, with the likes of Majid Al Futtaim (MAF), would present great investment opportunities to foreign institutional investors (FIIs) and high net worth individuals (HNIs). “This market will grow significantly by 2014.”

Particularly, he sees great scope for growth and maturity of the fixed income or sukuk market, “In India derivative volumes are 450 per cent of equities, and in Turkey this is 100 per cent. In the Middle East this is less than five per cent.”

Developing a secondary bond market is important for the region, since it will encourage investor focus to shift purely from equity markets to more stable fixed- income instruments. Subsequently, as larger corporates have increased access to capital market funding, more bank resources will be freed to finance small and medium enterprises. In this way, banks will play a greater role in financing the real economy and more sustainable jobs will be created.

Dubai’s real estate market is another green shoot, Meliti says. He thinks that it “has benefitted from the Arab spring and prices could therefore appreciate in prime locations.”