Kuwait Financial Centre (Markaz) in a report said that the overall GCC markets as measured by the S&P GCC Composite Index, lost 8% in 2011 after gaining 13% in 2010; this was a significant outperformance of MSCI EM, which was down 21%, and the MSCI World Index, which lost 10%. However, GCC markets were down for the year; the largest decline was in Bahrain which lost 20% given the high degree of political unrest and resultant economic ramifications followed by Kuwait with a loss of 16%.
The best performance was in Qatar, which managed to stay in the green with a 1% gain.
Markaz report said that regardless of the stock market performance, governments in the region were remained busy investing in infrastructure.
Arab Spring, nuclear disaster in Japan, Wall Street protests, Death of Osama Bin Laden and Col. Gadhafi, Greek mess, European banking crisis, unemployment in the Western world, recessionary and deflationary fears, high volatility in stock markets, loss of AAA status to US treasuries, gold price peaking, etc.
The S&P 500 stayed put and did not budge down. However, emerging markets and GCC cracked under pressure and ended up in the red. In spite of reasonably strong oil price and stable economies, GCC stock markets decided to dance more to the tune of global events than regional ones, breaking the traditional correlation between oil price and stock market performance. Stable earnings and attractive valuations did not encourage much of foreign investment interest who viewed the Arab Spring with trepidation. Consequently, liquidity dried up in certain markets rather severely mainly due to lack of bank lending, lack of market depth and lack of institutional investors.
For 2012, the authors have adopted a neutral view of the markets due mainly to lacklustre market liquidity and activity which is overshadowing more positive indicators on the economy and earnings. They are positive on Saudi Arabia and Qatar due to positive economic growth prospects, earnings potential and market liquidity.
Governments can do well by introducing long pending capital market reforms, including introducing derivatives market, and opening up foreign investment limits to broad base ownership and help elevate some markets to MSCI Emerging Market status.
The authors maintain a Positive outlook on Saudi Arabia for 2012 due to positive economic activity (especially a projected decline in inflation and increase in government spending) in addition to healthy earnings growth. Positive factors also arise in terms of attractive valuation and market liquidity which has been picking up.
The 2012 budget is expected to show a surplus of just $3billion due to lower revenue and spending in the coming year. Revenues for 2011 came in at $296billion as oil prices and production increased due to political unrest in the region; these are expected to go down to $187billion in 2012 as the global slowdown affects key trading partners like China.
Spending is expected at $184billion 14% lower than expenditure in 2011, although spending on jobs, housing and other public service projects is expected to continue.
Housing property prices are expected to rise in 2012 as the kingdom continues to grapple with residential real estate shortages for its growing population.
According to CB Richard Ellis, only 35% of locals own homes, with low and middle-income families making up around 80% of unmet demand.
As for corporate earnings, these are expected to grow 19% in 2012 versus a growth of 27% in 2010. Support is expected to come from the Banking sector, which the authors expect will grow at 16% in 2012 in addition to a healthy 20% growth in commodities.
As previously mentioned, market liquidity is up in the Kingdom. Value Traded came in at $291 billion for 2011, a 44% YoY growth.
The view on Kuwait remains Neutral due to poor market conditions; more muted economic growth and continued drying up of market liquidity.
The economy is expected to grow by 4.5% in 2012 following a growth of 5.7% in 2011, as oil prices soften and government spending pulls back. Inflation, which is expected to have jumped to 6.2% in 2011, due to subsidies and grants, is forecasted to come back down to 3.4% in 2012, which is on par with the long-term average.
Fiscal and Current Balances are expected to remain the highest in the Gulf, at 13% and 29% of GDP, respectively, in 2012.
Overall earnings growth is expected at 23% in 2011 followed by a slight moderation to 18% in 2012 due to muted growth in the banking and Telecom sectors.
The authors have Neutral view on Abu Dhabi while maintaining the same on Dubai (although with a slightly Negative bias). The view of Abu Dhabi is predicated on weak market conditions and the possibility of additional aid being extended to Dubai.
The UAE economy grew at an estimated 3.3% in 2011 and is expected to show a growth of 3.8% in 2012. Inflation is expected to remain at a manageable 2.5% for the year. Lack of liquidity is a problem as value traded in the UAE continues to dry up.
The Dubai budget for 2012 makes it clear that conservatism and cautiousness is the way moving forward; revenues are expected at USD 8.3bn for the coming year, the majority of which is expected to come from fees and service charges. USD 3.4bn of the budget (40%) has been allocated to salaries and wages while 35% will go to operating expenditures. Development projects spending placed at $1.6billion while $350million is set aside for loans and interest payments.
The emirate still struggles with a debt overhand of about $15billion, mainly related to Dubai World and Dubai Holding.
The Dubai real estate sector, while bottoming out, will continue to battle oversupply issues with residential prices expected to decline by about 15% as supply continues to outstrip falling demand. Abu Dhabi suffers from supply-demand imbalances, which would dampen prices there.
Corporate earnings are expected to rebound in 2011 after the Real Estate sector suffered a significant loss in 2010 (due to Aldar Properties) before moderating to a growth of 23% in 2012 as banks are expected to show a growth of 26% while telecoms grow at 6% versus a decline of 14%. The Real Estate sector is expected to have bottomed-out in 2011 and would return to profitability in 2012.
The authors remain positive on Qatar owing to its high economic growth prospects, healthy banking sector and heavy government support in addition to increasing liquidity.
The economy is expected to show another year of double-digit growth, boosted to a forecasted 19% in 2011 (due to high commodity prices) before falling back to a more sustainable 6% in 2012. The moderation of growth comes due to a self-imposed moratorium on the development of new hydrocarbon projects until 2015 as LNG production has hit 77 million tonnes a year, a 10-yr CAGR of 15%. High government spending and investments in the non-hydrocarbon sector is expected to boost growth to 9%.
Inflation remains well under control despite the growing economy, remaining at a steady 4% through 2012.
Qatar corporates are expected to show earnings growth of 14% for 2011, driven by Commodities and Real Estate. Banks are expected to grow 10% while Telecoms are flat due to ForEx losses which have squeezed earnings.
For 2012, the report shows that banks are expected to grow at about 14% as lending continues while provisions decline further. Likewise, Telecoms are forecasted to have a slightly better year, growing at around 10%. Some softness is foreseen in Commodities, growing at 30% versus an estimated 50% in 2011.
Qatar has been leading in terms of liquidity strength, taking the second place for the year at $22.7billion, a 22% growth.
The authors have maintained their view on Oman at Neutral due to moderate earnings growth, lower liquidity and declining economic growth.
Real GDP is expected to have grown at 4.4% in 2011 to decline to 3.6% in 2012 as economic growth slows. Consequently, inflation is also expected to decline through the years; it is forecasted at 3.8% in 2011 before declining to 3.3% in 2012. Given healthy oil prices, the government balance is expected to remain quite healthy, at about 10% of GDP in 2011 before falling to 6% in 2012.
Full year corporate earnings are forecasted to show a decline of 25% to $1.4billion due to telecoms and financial services weakness. For 2012, the authors expect banking to pick up to a growth of around 13% from 7% in 2011e, while Telecoms, which were down 24% in 2011e, should see a moderate growth of about 5%.
The outlook on Bahrain is neutral but verging on negative due to weakened corporate earnings outlook in addition to negative investor sentiment and market liquidity.
From a 24% annual growth in 2010 we expect FY 2011 corporate earnings to be flat in 2011 due to financial services weakness before expanding by about 7% in 2012.
According to the latest economic forecasts from the IMF, Real GDP across the GCC is expected to show a growth of about 6.7% in 2011 to moderate to a rate of 4% in 2012. Growth in 2011 was driven by spiking crude oil prices at the beginning of the year on account of political turmoil coupled with increased government spending. Growth in Saudi Arabia is expected at 6.5% in 2011 due to high oil revenues as the Kingdom ramped up production to compensate for lost Libyan production. This is expected to come down by about half in 2012 as the situation stabilizes in Libya while oil demand on a whole is slated to come down as the world economy slows. Kuwait GDP growth was up as well on account of higher oil revenues, estimated at a rate of 5.7% in 2011, but is expected to come down by around 4.5% in 2012.
Both Saudi Arabia and Kuwait saw jumps in inflation during 2011 due to government grants and subsidies. Saudi inflation is expected to remain in the 5% range in 2012 due to continued high rent and food prices which make up a combined 46% of the CPI basket. Kuwait’s inflation is expected to come down by half in 2012 to about 3.4% while Qatar inflation is expected to double.
Fiscal Balances expanded throughout 2011, mainly due to high oil revenues from the beginning of the year; however, they are expected to tighten in 2012 as government spending increases while a slowdown in global economic conditions reduces oil prices and, subsequently, government revenues.
According to the IIF, the consolidated current account balance of the GCC is estimated to top $285 billion in 2011 (from $150 billion in 2010) on account of a positive commodities environment, epitomized by the oil spikes during the year and increased production out of Saudi Arabia. This is expected to come down slightly to $227billion in 2012.
Money Supply (M2) growth was down sharply in 2010 across most GCC countries except Qatar where growth came in at 23%, i.e. on par with its 2003-2009 average. There was a slight pickup in M2 growth in 2011, but not significantly. Saudi, Oman and Kuwait registered 12%, 9% and 10% growth rates, respectively, while M2 growth in Qatar surged to 27%. Notably, the UAE saw M2 growth decelerate to 4%.
Going forward into 2012, we expect corporate earnings to top $64billion, a 19% annual growth. Consequently, the GCC-wide PE should decline to 11x with all country valuations declining.
Earnings growth is expected to continue a steady growth in 2012, topping $64billion, which would bring it back to the levels reached in 2007 prior to the on-set of the global crises with the UAE set to grow at 23% while Saudi Arabia and Kuwait are forecasted to show an earnings growth of around 19% each.
Value traded has picked up in 2011, expanding by 19% to $354billion. Growth was driven by Saudi Arabia and Qatar; the former increased 44% for the year while the latter expanded 22% to usurp the position of second most liquid market in the GCC.