Nomura joins growing chorus concerned about overheated Gulf stocks

Regional stock prices, particularly in the UAE, have been boosted too much by ease of access to cheap financing, a situation he said was reminiscent of behaviour before the previous crash in 2008.

The chorus of fund managers warning that Arabian Gulf stocks are getting too hot has just grown one notch louder. The asset management arm of Nomura Group, best known for being Japan’s biggest securities brokerage, has joined the increasing number of well-informed voices expressing concern that equity valuations in the region are exceeding prospects for corporate profit growth.

Tarek Fadlallah, the head of Nomura Asset Management’s Middle East operations in Dubai, said that regional stock prices, particularly in the UAE, have been boosted too much by an ample amount of cash in circulation as well as ease of access to cheap financing. The situation, he said, was reminiscent of behaviour before the previous crash in 2008.

“Alas, the spectre of a stock market driven increasingly by liquidity rather than reasonable valuations raises uncomfortable parallels with the risk-taking activity across the region a few years ago,” Mr Fadlallah said. “Then, just as now, investors complained about the lack of alternatives to stocks and real estate and found themselves increasingly drawn into speculative trading.”

While Nomura has had a presence in the Dubai International Financial Centre for more than five years, the firm’s asset management arm opened a dedicated office last month to tap the growing amount of oil-generated cash reserves held by sovereign wealth funds and other large investors. Nomura manages about US$7 billion for these clients.

While there has been a sharp rise in global assets this year that has resulted in the S&P 500 advancing to a record, Mr Fadlallah still sees opportunities in Asian nations such as Japan, Indonesia, Thailand and the Philippines, a part of the world that Nomura specialises in and is well placed to make informed investment decisions about.

In the Gulf though, the rate of growth of equity prices has been much higher than the global average – and that worries him. He noted in a report on Arab markets to coincide with his office’s launch that while the MSCI World index, a benchmark measure of global equities, has gained 5 per cent over the past five months, Gulf markets have added 13 per cent during the same period.

Dubai’s benchmark stock index alone more than doubled last year and has gained 38 per cent this year, making it the best performer worldwide this year. Fund managers from BlackRock, the world’s biggest, to Franklin Templeton, which specialises in emerging markets, have said in past months that stocks in the UAE are starting to look expensive.

Still, the comeback of UAE and other Gulf markets has not all been built on castles in the sky. The economy of the Emirates has been undergoing a renaissance in the past year-and-a-half as government spending on infrastructure and a revival in trade and tourism has spurred businesses and individuals to tap record low financing to fund expansion, investments and big ticket items such as cars and homes. The upgrade this month of UAE and Qatar stocks to the MSCI Emerging Markets Index, a gauge of equities of developing nations that includes Brazil, Russia and India, and Dubai’s clinching of the right to hold Expo 2020 have also helped to boost confidence. However, since the MSCI promotion on June 1, Dubai’s main index has dropped 8.3 per cent, including an 0.6 per cent drop yesterday.

As well as worrying signs of excess in the Gulf, Mr Fadlallah expressed concern about the economic slowdown in China, the world’s second-biggest economy, the large amount of cheap money the US Federal Reserve and the European Central Bank have been pumping to reinvigorate economies (along with low interest rates), as well as political instability in emerging markets such as Ukraine.

“The world has not experienced periods of such high debts and heavy central bank interventions during peace time and never in the interdependent and open global economy in which we now operate,” he said. “For all the assurances provided by [US Federal Reserve chairwoman Janet] Yellen and [ECB president Mario] Draghi, the track record of central bankers in predicting economic shocks and preventing market chaos in the past 30 years is poor – indeed. they have often sown the seeds for the next crisis. We should worry.”

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