When do Gulf stocks become a long-term buy again?

Posted on 01 March 2010 with no comments from readers

Arabianmoney likes to think in terms of long-term investments, not which stock to buy this morning to sell by noon. Sadly the day trading mentality is pretty entrenched in the Gulf and this adds to market volatility and the inevitable losses for those who just have to trade.

However, that is true for any stock market. The big gains are made by the likes of Warren Buffett who buy the right stocks and stick with them.

When to buy

Of course, you need to know which stocks to buy and when. Let us focus on the issue of when to buy. Spotting a market bottom is not easy, and perhaps impossible, but that is the point you want to put your hard earned money into the right stocks.

It was interesting to see Daman Investments launch its AED200 million fifth fund focused on Gulf investments last week. This closed-end fund closes on April 7th.

Group managing director Shehab Gargash commented: ‘Markets go through up and down cycles. The GCC markets are well poised to chart an impressive recovery. We’ve seen it happen before and we will see it once again.’

This is certainly a contrarian approach. GCC stock markets have been in the doldrums since their last crash in late 2005, and have been hit hard by the global financial crisis and credit squeeze.

Yet buying good stocks on the cheap is precisely how Warren Buffett made his billions. Mr. Gargash supports his case with the following comments on valuations:

• The regional GCC markets are currently trading at forward estimated valuation multiples of 10.2x for year end 2010 earnings estimate which are at a discount when we compare to then historic price-to-earnings average range of 18x for the past five years.

• Taking price-to-book ratios we continue to find further support for the valuation case with the GCC region trading on 1.4x 2010e.

• The full-year 2010 dividend yield at regional markets is estimated to be at an average of 3.9 per cent with many individual stocks having yields in excess of double digit figures making the region an attractive play for income related investors.

Cheap markets

These valuation metrics make GCC markets look comparatively cheap. But arabianmoney thinks they will get cheaper. Readers will know that we consider a global stock market correction or even a big crash imminent, and in such a storm all ships have a tendency to sink.

However, as soon as this storm is over that might be a very good time indeed to invest in Gulf stock markets. There is a seven-year cycle running in these markets from boom to bust, and the last bust was already five years ago.