Is the region set for a stock market boom?

Author:Album, Andrew
Position:Middle Eastern stock markets - Business & Finance

With international investors roaming the world looking for promising new markets in which to invest, and with many Arab governments looking to privatise state-owned industries, the region's share markets may be set for a boom. Andrew Album takes a look at three equity markets in Tunisia, Jordan and Egypt.

In recent years, "emerging markets" has become a buzzword for the global investor. Not satisfied with the potential returns offered by local equities and bonds, they have scoured the world in search of new opportunities, where a greater degree of risk would hopefully be rewarded with substantial returns.

At first, the emerging economies of South East Asia appeared to offer the best potential and billions of dollars of capital flowed into the region, in the form of direct equity investments, and also through mutual funds. As the economies of these countries continued to grow at a breathtaking rate, those who put their money in early were well rewarded.

More recently, with falls in some Asian stock markets, and a realisation that the days of incredible returns may have passed, some investors moved on to newer and even more exotic markets in Latin America, India and China. It was only a matter of time before the potential opportunities offered by the markets in the Middle East were under sharp investor scrutiny.

Stock markets within the region have traditionally been small and underdeveloped, for two reasons. The first is that, in many Arab countries, there has been an unprecedented degree of state control over industries. Most businesses were owned by the state and the role of the private sector was far smaller than elsewhere. Secondly, those private enterprises that did exist were usually relatively small in size and were traditionally family owned and controlled. When these businesses needed capital and the owners did not have sufficient resources to provide it, businesses turned to the banks as a source of funding. Few companies attempted to raise money by issuing shares, preferring, instead to raise loans and therefore maintain complete control over their businesses.

As other countries have found, however, share markets can be a very efficient way of raising capital to fund business expansion and acquisitions. Equities do not require an annual cash commitment that loans demand in the form of interest payments.

In the last few years, companies across the region have started to reconsider their previously ambivalent attitude to raising...

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