“Increased interest of foreign investors in the UAE and Qatari markets following the MSCI upgrade is also expected to contribute to the up-move. Amongst others, continued momentum on reforms, healthy economic growth, investment in non-oil sectors, stabilization of oil prices, recovery in real estate sector, better corporate earnings and compelling valuations are likely to be the key positive triggers for the GCC equity markets,” the report added.
Alpen Asset Advisors Limited, the newly created Independent Financial Advisory and Asset Management Company and associate of the investment bank, Alpen Capital published its “GCC Market Outlook for 2013”.
According to Bloomberg consensus estimates, earnings of equities constituting the MSCI GCC index are expected grow a healthy 10.3% YoY in CY2013.
The broad macro environment for 2013 also encourages this growth as the end of fiscal cliff in the US and quantitative easing in emerging markets as well Europe would provide much needed impetus. According to the IMF, real GDP growth in GCC is expected to slow down to 3.2% from 5.7% in 2012. This is primarily due to the scaling back of the growth rate in hydrocarbon production. The economic growth, however, remains contingent on several factors such as stable oil prices and continuous improvement in socio-political situation in the region. The overall GCC market, however, remains exposed to spells of volatility that could arise from lack of institutional participation, high dependence on oil, and any impediment to global economic revival.
“The GCC equity markets offer investors a unique combination of strong corporate earnings growth, high dividend yield with reasonable valuations,” Sudarshan Malpani, Managing Director, Alpen Asset Advisors Limited, said.
“The markets are just starting to get on the radar of international investors and also being actively considered for intra GCC cross investments. Hence, we believe that the markets in the GCC are on the cusp of huge growth in terms of size and continuing strong market performance. International money will flow, driven by market friendly reforms by the regulators. Reforms could focus on easier listing norms for broader markets, higher foreign ownership limits and single registration for GCC wide investment ability for foreigners. Our report offers investors insights into the themes and sectors which will drive the GCC markets going forward,” he added.
Historically, GCC markets have been characterized by high volatility due to the absence of foreign investors and lack of market breadth. However, it is expected that an expansion in market breadth and depth due to increasing foreign participation, especially in the UAE. Moreover, the region has evolved as a regional hub for IPO activity—GCC, primarily Saudi Arabia and the UAE, accounted for 97% of the total capital raised in the MENA region in 2012.An increase in IPO activities is indicative of lower stock market volatility and upbeat economic growth, and further supports the optimistic outlook for the GCC stock market.
Recent stabilization in oil prices is likely to improve the fiscal position of GCC governments and encourage investments in non-oil sectors. Refining and infrastructure projects worth $700 billion are likely to be undertaken in the region. Rising government spending would boost the region’s economic performance in 2013.
The real estate sector assists construction-related industries and is also an indicator of the overall business activity. The sector was a key contributor to the economic downturn of 2008. However, the real estate sector in GCC is on a gradual recovery path.
The GCC markets are well positioned to grow in both short- and medium-to-long term. Healthy earnings growth is expected across major cyclical sectors in the region due to an improvement in macroeconomic conditions. An attractive valuation, coupled with expectation of healthy earnings growth, would continue to boost confidence in the region’s stock market.
Select Sectors in Focus
As the GCC economies are poised for growth, the focus remains on select sectors which have immense growth potential. These include Retail, Banking, Real Estate and Construction, Transport and Logistics and Telecommunication.
The Retail sector is set to grow in view of favorable demographics supported by rising disposable income. Online sales are another segment which will spur the growth of the sector owing to increased internet penetration and shifting lifestyle. The earnings in the sector are expected to grow by 16.7% in 2013. The Retail sector is trading at a current P/E of 15.6x –in line with its historic average (2009-12) of 15.2x, however much lower than the emerging market average of 24.3x.
With the Real Estate boom and growing private consumption improving private sector lending, the banking sector is all set to be on a growth trajectory. Expansionary government policy is fuelling funding needs especially in non-hydrocarbon sectors. Credit growth is also expected to be driven by strong macro-economic fundamentals.
Demand for affordable housing fuelled by encouraging lending rates and favorable policy environment have contributed to the boom of the real estate sector. Spillover effect on construction and related sectors from robust infrastructure project pipeline in the GCC is another factor supporting the growth. Earnings are expected to grow by 14.6% in 2013. The Real Estate Sector is trading at a discount of 19.8% vis-à-vis emerging economies.
The increase in tourism and trade demand better air, road and sea infrastructure. Earnings are expected to grow by more than 100% in 2013. The Sector is trading at a current P/E of 13.0x – a discount of 15.4% vis-à-vis emerging economies.
Favorable demographics and young tech savvy population are expected to drive demand for data services. Rising demand for smart devices would further propel demand for data services. The sector’s earnings are expected to grow by 6.5% y-o-y during 2013 and average dividend yield is forecasted to increase to 5.3% in 2013. In terms of current valuation, the sector is trading at a current P/E and P/B of 11.8x and 1.9x, respectively.
“Although the GCC economies are poised for growth, they do face several challenges such as excessive reliance on oil, political instability and global slowdown. These economies also face other potential risks, particularly external credit risk, as GCC is one of the major creditors in global financial markets. Despite these factors the GCC stock markets are expected to capitalize on the robust macroeconomic outlook for the region in 2013,” the report added.