Middle East - Resurgent Investor Behavior

Ahead of our Securities Financing Forum in Dubai on 11th November we have taken a look at the scale of securities lending across Dubai, Kuwait, Qatar, Israel, Egypt, Bahrain, Abu Dhabi, Doha and Jordan. We can point to some interesting institutional buying of Israeli equities over the summer but low short interest across the board. We will also look at investor appetite for Dubai’s recent debt issuance. We look at Delek Group (TLV:DLEKG), Bank Hapoalim (TLV:POLI) and Partner Communications (TLV:PTNR).

It is worth mentioning that short selling is well supported in the Middle East if Abu Dhabi’s stock exchange deputy CEO is anything to go by. Mr. Rashed Al-Baloushi was cited by Bloomberg recently saying that the U.A.E is set to introduce short selling to further enable entry into the MSCI classification as an emerging rather than a frontier market.

We cannot point to any significant short selling taking place across Middle East as a whole. Israel is well set up to allow short trades, but investors are not currently particularly keen! There has been a recent increase in borrowing in Discount Investment Corp and Ormat Industries but borrowing is generally reducing across the TA-25.

If we look at the ratio of securities lending approved inventory (shares held in Custody by large funds) to stock on loan, the figure is heavily skewed to their being more supply than demand. The ratio is 35:1 compared to 12:1 in the US and UK.

Of the 840 names we looked at in Middle East, typically 1% of the shares in issue are held by funds who lend and on average 0.03% is on loan. However, what catches the eye if we look at the Long Short Ratio is the increase in inventory in June this year. This was largely attributable to an increase in Israeli holdings in names like Delek Group (DLEKG), Bank Hapoalim (POLO) and Partner Communications (PTNR).

We were interested to look at whether or not any lending funds had taken up Dubai’s recently issued sovereign debt. We can see more of Emirate of Dubai 2020, 2015 and 2013 in lending programs given they pay interest of between 4.25% and 7.75%.

It seems that foreign investment in companies across Middle East has a long way to go since even the ETF instruments do not offer any real exposure. The popular iShares Emerging Markets ETF (EEM) does not own any Middle Eastern companies and we cannot find any single ETFs based upon some of the countries names above. This is a shame given the preponderance of easy to understand telecommunications and utilities firms in the U. A.E and surrounding nations which pay dividends and offer reasonable prospects for growth.

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