Greece is a star performer and Turkey has made a sharp recovery this year. But the markets of the Middle East and Africa remain peripheral for most international investors
Greece has been the market which has caught everyone's attention, and it has certainly driven some other markets in the region. The Greek government’s determination to press ahead with its convergence policies, in the face of opposition from the trades unions, has helped the Athens equity market to be among the best performing world-wide over the past year.
David Aserkoff, European equities analyst at Credit Suisse First Boston, believes it is a classic example of convergence theory. “Although the performance this year looks extraordinary, it really is as a result of convergence. Last month, however, the central bank expressed concern about the index, and also seems to disagree with the government what should be done, and so we have seen a levelling off and then a 10% fall. It is clear that interest rates will come down, but I believe equities have already priced that in,” he adds.
The privatisation process and political reform packages have been unpopular with many groups, from state bank employees to teachers, but the government’s fiscal and monetary policies have kept Greece on track for EMU during 2001. This has resulted in the Athens General Index soaring 81% since last March.
Mariella Parfyratos, head of equity analysis at NBG International in London, sees no reason to believe that this positive economic cycle will not continue. “In the past we have seen short-lived cycles, but this one is driven by the urgency of the convergence programme. All the indicators suggest that this upward movement will continue beyond a year.”
The strength of the equity market, and the underlying reasons for it, have also calmed the fixed interest market, which is witnessing a fall of rates in line with inflation, but also convergence with German yields.
“There is no question but that the current fiscal and monetary policies have paved the way for the equity boom, but they have also resulted in huge primary surpluses, which have helped to bring down not only the budget deficit, but also levels of overall debt,” asserts Mark Rall, emerging markets analyst with Hypovereinsbank in Munich.
With the deficit down to 1.9% of GDP from 2.4%, and overall debt reduced to 105% of GDP, the economy is on track for EMU. This is despite the fact that the government’s expected growth figures may be optimistic, given the conditions across Euroland. Rall feels that the steepness of the decline in yields confirms the success of the government’s policies.
Greece remains however, a member of the European Community first and foremost, and so correlation tends to move northwards rather than to the south and east.
Meanwhile, Turkey has seen a strong rally over the year, unaffected by the appalling tragedy of the earthquake. The new government has initiated a stability programme aimed at acquiring an IMF loan. “For a number of reasons we are quite bullish about Turkey and its prospects for 2000,” says Aserkoff.
Murray Devy, director of Rexiter Capital Management, also believes that Turkey has great potential, but sees it as a long-term prospect. “There have been some interesting dynamics of change in Turkey, prompted by IMF recommendations. The new government, in place since the summer, has begun to reform and re-finance the public sector. Long-needed pension reform is also taking place, including a change in retirement age. The object of these reforms is to tackle the chronic inflation of the last few years which has raged from 70% to over 100%.”
Such inflation figures have obviously led to unsustainable real interest rates of around 40%. Nevertheless, despite the distractions of the earthquake, the government and industry seem more committed than in previous years to tackling the underlying problems. Devy believes this could lead to inflation dipping into the 30-40% range over the next year and falling to the 20% range in 2001.
“Turkey has great potential, boasting a very able private sector, and a dynamic internal economy. The potential of the stock exchange is massive, but everything depends on the continuing fight against inflation,” says Devy.
Prospects in Israel are, as usual, dominated by the peace process. It has been something of an up and down year, but analysts are generally positive. Major worries remain about the currency and inflation. On the macro-economic front the most worrying issue is the current conflict between the ministry of finance and the Bank of Israel. This has meant that the cuts in interested rates, anticipated at the end of the summer, have not come to pass and indeed that there is a possibility of hikes in the new year as inflation fears grow.
“The economy is locked into a cycle of low growth, as the interest rates cuts which are needed to stimulate the economy are not risked because of the worries about a run on the currency,” says Devy. “The stock exchange is really divided between stocks which look under-priced but which have little growth potential, and the high-tech stocks which are at the heart of the dynamism of the economy.”
Although the prospects for Israel look neutral, small growth in 2000 should drive up earnings. The other plus is the progress of the peace process, not only with the Palestinians but also with Syria where good progress has been made over the year.
The success story of the Mediterranean region is unquestionably Egypt. Roni Argi, Mediterranean equity analyst at HSBC, believes the market could double over the next 12 to 24 months. “I would expect Egypt to be one of the few emerging markets that can look forward to consistent growth over the next couple of years,” he says. “The macro-economic picture is truly compelling, and the government is to be congratulated on its commitment to fiscal management reform and liberalisation." Earnings growth has been solid over the year, and the Egyptian market remains under-priced, Argi believes.
“There are a couple of short-term issues, however. One is the liquidity off the market, and the other is progress on privatisation. But generally we are very bullish on Egypt.”
The downside is continuing high interest rates, and the fact that Egypt is a peripheral market so far as most fund managers are concerned. Despite the dynamic economy, the market is mainly driven by local investment. Although the outlook is good for Egypt most analysts do not see any catalyst likely to spark international investment.
Elsewhere in the region the new king of Morocco is trying to woo international investors to its nationally dominated market, and re-assure them that he can continue the stability associated with his late father’s reign. “The market is currently expensive,” says Argi, “and growth prospects are not good. Expect interest rate rises sooner rather than later.” If Morocco does have an advantage over other countries in the region it is its closeness to Spain and France.
There is a similar story in Lebanon where a change of government has not produced the anticipated change of fortunes. Poor public accounts and high public debt leading to higher interest rates are likely to mean a sluggish equity market for the foreeable future.
Further south the prospects of South Africa, like those of Israel, are stuck between a rock and a hard place. With the economy stubbornly refusing to grow at the rates predicted by the government, lower interest rates are called for. Unfortunately the rand is not strong enough to withstand the currency markets’ potential reaction to such a step from the central bank.
So far the government has not found a solution to this conundrum, and there are worries that this could lead to political unrest in the fledgling democracy. There is a fear among some analysts that the current crime wave in the major cities across the republic could develop into something more threatening for the government. Confidence is also being hit, with a number of local companies moving their quotations overseas.
“There is good corporate governance and disclosure, and the market looks good on the surface, but it remains unattractive,” says Devy. “There is a hope that commodity prices could come to the rescue, but these have been in steady decline for 30 years. They may well spike up, but will inevitably fall again.”
He describes South Africa as a stock-picker’s market, but suggests there may be interest in the commodity cycle, but only with a view to selling profit.
Other markets across Africa are really too small to interest international investors, but Nigeria remains the sleeping giant. “This really should be a major market, but it has been disappointing since time immemorial. Corruption is so ingrained that everyone continues to shy away,” Devy adds.
The region is likely to continue to be seen as a defensive region by most investors during the next 12 months, although a couple of markets are clearly going to attract attention. The remarkable strides in reform and progress in IMF talks make Turkey a case in point. Most analysts agree that the stock exchange has not reacted as well as expected to these events. The trigger could be an IMF deal and a new 2000 budget. If the government can slow the devaluation of the Lire to one to two per cent per month, and avoid a devaluation, this should bring down interest rates and spark equities.
Despite continued optimism on Greece, there is an underlying worry of a downturn in stocks relative to bond yields. The downside relative to Euroland stocks could be significant, especially if, as anticipated, Greek valuation metrics converge on Euroland levels, as happened in Portugal, Spain and Italy in their own convergence on the single currency. With other worries about Israel, and foreign aversion to many of the smaller markets, Greece and Turkey remain the markets to watch, with attention possibly shifting from the former to its neighbour in 2000.
Kevin Hall

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