Despite the troubling issues facing investors in the Gulf such as corruption and incompetence, which have been exasperated by the global financial crisis, there is still a case to be made for finding value stocks in the region.
The option becomes even more attractive during uncertain times when defensive stocks can offer higher yields than treasury bills in the US, especially in these times of record low interest rates. Usually, one would advocate investments in listed bonds – for example, those listed on the Dubai Financial Market – but their battered prices reflecting investors’ possible lack of confidence in their repayment or valuations, along with their almost nonexistent trading volumes even in the best of times, make them an unattractive option.
Note the success of McDonald’s during the current global financial crisis – the company’s sales grew by seven per cent last January. The closest thing we have in the GCC is Americana, also known as Kuwait Food Company. There is a reason why Gulf countries have some of the highest rates of diabetes and blood pressure in the world – we love our junk food. Anyone strolling through a shopping mall in the Gulf these days will notice that most consumers are forking out money in the food courts. Cinnabon, McDonald’s and Starbucks are especially popular, despite the latter’s dwindling sales worldwide.
The only firm listed in the region that offers exposure to the diabetes market is Americana. It owns the franchise and distribution rights in the region and operates over 900 restaurants including Baskin Robbins, Pizza Hut, KFC, Hardee’s and Krispy Kreme. The fact that the stock has seen a sharp decline in recent months only makes it a more attractive equity to invest in, especially in light of its expansion in countries such as Kazakhstan, Ukraine and Turkey. The company’s increased sales and profits from its core activities have only been offset by decreasing income from “investments,” a habit that one hopes the company will refrain from pursuing in the future.
Many people don’t realize that much of the food mentioned above, as well as other consumer goods and products, make it to restaurants and supermarket shelves by sea cargo. Many also don’t realize that DP World, the world’s fourth largest container port operator and the region’s largest terminals operator, is responsible for handling most of these shipments. In fact, it is estimated that up to 90 per cent of global trade is carried through container ships worth 6$ billion tonnes of goods valued at US $7.4 trillion. As such, DP World is in a prime position to take advantage.
Although the so-called trade slump is forecasted to last until 2011, the strategic ports that are managed by DP World ensure that it will be among the first to bounce back. A stock price of US$ 0.18 (recorded on February 5, 2009) is a much more realistic valuation than the ridiculous listing price of US$ 1.20 in the fall of 2007 that will go down in GCC equity history as one of the most disastrous valuations cooked up by regional and international investment banks. Proof of which was the Dubai Financial Services Authority fining SHUAA Capital almost US$1 million last fall because it had “artificially inflated” the stock price earlier in the year.
Other transport companies that may benefit from the global credit crunch and the so called exodus in the GCC labor market are Sharjah’s Air Arabia and Kuwait’s Jazeera. One of my favorite quotes from Richard Branson goes: “The easiest way to become a millionaire is to start out a billionaire, then go into the airline business.” No-frill airlines in the region such as Air Arabia and Jazeera could yet scoop away business from luxury carriers like Etihad, Qatar Airways and Emirates. Jazeera’s strategic coup in gaining a foothold at Dubai International Airport (the world’s sixth busiest airport handling over 37 million passengers in 2008, according to Airports Council lnternational) as the sole no-frills airline would give it a much sought· after advantage.
The recently announced delay in operating FlyDubai from Dubai World Central “for a year” due to pushing back Al Maktoum International Airport’s operations will only bode well for Jazeera. Moreover, Air Arabia was quick to establish a second hub in Morocco to serve the European markets, which is mystified by the beauty of the North African kingdom. The country attracted over seven million visitors last year and is 30 per cent cheaper than its European rivals to holiday in. If Air Arabia capitalizes on that market, it may be able to weather the crisis. Having said so, please remember that this article reflects solely my biased opinions and is not to be taken as advice to invest.
Finally, I must mention that a minor problem with the above stock picks is actually finding money to invest.
This article originally appeared in the March 2009 issue of MONEYworks.