“Global economic growth is forecast at 3.6 per cent, with 1.2 per cent for the United States and 0.2 per cent for Europe. The GCC’s aggregate nominal GDP is expected to reach US$ 1.5 trillion in 2013, having achieved a 6 per cent CAGR over the past five years,” the report said.
“GCC equities are forecast to generate moderate returns in the range of 10 to 15 per cent in 2013, driven by an improvement in overall fundamentals, multiple re-rating and earnings growth,” it added.
“Internationally, equities remain the preferred asset class as cash continues to provide a near zero return. With economic growth picking up, bond markets are expected to come under pressure, as monetary global policies slowly reverse direction,” the report, added.
This optimistic outlook for GCC equities forms the basis of a new ‘GCC Equity Markets Outlook’ report from Bahrain-based regional investment bank, Securities & Investment Company (SICO).
According to the report, GCC markets performed well on a broad level during the past year, with two-thirds of the top 100 stocks ending with gains, while a sharper performance was seen from small-to-mid cap stocks. Large cap stocks, which had a subdued performance in 2012, are expected to outperform small cap stocks in 2013.
The report covers the prospects for a number of key sectors in 2013. Citing reasons why investors should invest in the GCC markets, the report mentions that the subsequent improvement in corporate earnings since 2009, when profits bottomed out, is not fully reflected in current market prices, leading to attractive valuations. The S&P GCC Index is currently trading at a PER and PBV of 11.3x and 1.5x respectively. The balance sheet growth of GCC banks continues to remain strong, driven by an improved regional economic environment that has benefitted from expansionary fiscal policies. The asset quality of banks is currently better than previous years, leading to lower provision charges and higher net profits. GCC banks are well-capitalised and have ample liquidity, and are thereby capable of meeting increased domestic lending needs, driven by higher government spending on infrastructure and industrial projects. The regional project pipeline remains strong at about $2 trillion, and has grown by 9 per cent year-on-year, implying a backlog equivalent to twice the GCC’s total current GDP.
The report notes that the regional telecommunications sector will remain fiercely competitive in 2013, with high penetration levels capping subscriber growth potential. Companies will focus on cost optimisation and redundancy measures to enhance margins and earnings; while merger and acquisition (M&A) activities will continue. In the petrochemicals sector, commodity chemicals prices will remain as volatile as 2012, depending on short-term supply and demand conditions, which contribute to oil price movements. The International Energy Agency (IEA) recently reversed its outlook for crude oil markets, suggesting a tighter oil market than originally assumed, with rising demand estimates pushing against a decline in OPEC output. SICO Research forecasts Saudi petrochemicals to remain in the first quartile of the cost curve even if the gas prices are hiked to reasonable levels in Saudi Arabia, as widely expected by many energy analysts.
According to the report, most regional real estate companies enter 2013 with improved balance sheets and asset quality; while increased government spending and higher oil prices have led to a revival of the region’s construction sector. The overall outlook for the regional real estate sector is mixed, with performance varying by segment and country.
Growing populations in the GCC are expected to support increased consumption, driving revenues for both consumer and transportation companies. However, cost pressures and the inability to pass on higher input costs to customers, will pressurise food producers margins. Regional air freight grew at an average 15 per cent in 2012 compared with a decline of 1.4 per cent for global air freight. The underlying strength in regional air freight and overall trade is expected to remain strong in 2013; with continued expansion of the transportation sector being driven by M&A activity.
However, the report highlights a number of concerns that could impact the growth of GCC equity markets in 2013. Although regional geopolitical risks are stabilising, a renewal of social and political conflict in some non-GCC Arab countries is likely. Unemployment remains a key issue for the region, which has a fairly young population. This is increasing the need for structural reforms and diversification in the non-oil sector, creating incentives for future job creation and growth stimulation. Growing regulatory pressures on private sector companies to nationalise their workforces and implement fees on expatriate workers to decrease nationals’ unemployment, will have a negative short-to-medium-term impact on labour-intensive sectors.
Another concern highlighted by the report is that regional economies are still significantly dependent on hydrocarbon revenues, making them vulnerable to changes in demand and pricing. Real hydrocarbon sector’s GDP growth in the GCC is expected to decelerate from 4.5 per cent in 2012 to around 1 per cent in 2013, on the back of an expected slowdown in oil production. Any pressure on oil prices will limit gains in heavyweight petrochemical stocks. However, non-oil GDP growth is forecast to remain stable in 2013 at 5.5 per cent, similar to 2012 levels, with the contribution of non-oil GDP expected to increase in the future.
Foreign portfolio investment in the region has not picked up yet. GCC markets witnessed net foreign investment of US$ 0.81 billion in 2012 compared with an outflow of US$ 1.31 billion in 2011, excluding Bahrain. The number of IPOs in the region remained low in 2012, with only nine issues, similar to 2011 but with a higher value. However, 23 companies have announced plans to go public as and when market conditions improve.
The report also highlights that a lack of interest from ‘sticky’ long-term investors, such as regional and foreign institutional and domestic high net worth individuals, may continue. GCC markets, especially Saudi Arabia, are driven by retail investors, leading to more speculative trading and frequent profit bookings. A lack of triggers, the slow pace of market reforms, and low trading activity remain key concerns for institutional investors.
Most regional banks and insurance companies are likely to continue their cautious approach to equity markets in the foreseeable future. At the same time, significant regulatory changes – such as the UAE mortgage cap and the Saudi mortgage law – are leading domestic banks to adopt a ‘wait-and-see’ approach.