Date : 31/12/2009
Author: Markaz Analyst Club
Will GCC markets recover during 2010?
GCC stock markets have terribly underperformed other markets, both Emerging and Developed, during 2009. The overall MSCI GCC Index gained just 18% against 73% for Emerging markets and 27% for MSCI World. This depressed market activity comes in spite of decent crude oil prices (IPE Brent is up 85% for the year), low inflation (down to 2.5% in 2009 from 11% in 2008) in addition to fairly comfortable fiscal surpluses across the major economies.
The question then is; given such underperformance, do GCC markets present a good opportunity for 2010? And are we likely to see a recovery in market performance in 2010?
Mr. Ramadoss Venkateshwaran, who specializes in the Real Estate segment, pointed out that the question itself “tempts one to conclude that an upswing rally is due for GCC markets, especially when the region is slowly coming out of internal crises which emerged as a by-product of the global crisis and slowdown.” He notes that what distinguishes frontier markets such as the GCC is in the realm of systemic risks, pointing to events such as Gulf Bank, Saad & Algosaibi and Dubai World as a hallmark for such risks. “Although incidents of such systemic risk events increase during a downturn in all markets, like Lehman Brothers, the lag between the end of a downturn and the end of such incidences is bigger in frontier markets.” He goes on to point out that in the developed world; these events tend to act as precursors to a trough or bottoming out “as the number of such incidences recedes”. However, in frontier markets such as the GCC, such events followed the period in which the IMF and other such agencies had forecasted economic recovery. Consequently, such “risk perceptions have kept prices from rising and I believe that, if the global economy manages to avoid a double dip, as expected by the central consensus forecasts, GCC markets would pose a good upside from current levels as risk perception wanes.” (Mr. Ramadoss Venkateshwaran)
Moving from systemic risks in GCC economies to corporate earnings strength, Mr. Amrith Mukkamala (Senior Analyst, Research) notes that 2010 earnings “are not expected to be significantly robust. We are looking at +6 to +8% growth in earnings at a GCC level. The only country which is expected to witness a significant growth in earnings is Kuwait.” Furthermore, given the outflow of foreign money, he expects external liquidity to be neutral. Mr. Raghu Mandagolathur, S.V.P. for Research, notes that “even during good days, market performance can mostly be attributed to local liquidity and speculation rather than foreign investor interest. Foreign investors still view the GCC as a frontier market with serious limitations including lack of corporate governance, information and research. A good run on oil price may bring back some hedge funds that are keen on quick money but it will take fundamental changes at a market microstructure level to get the attention of quality institutional investors.” Moreover, internal liquidity is expected to be tight with negative investor sentiment due to “low corporate disclosures and comparatively poor corporate governance standards. Thus, in absolute terms I would expect a 15-20% return on MSCI GCC in 2010. This would mean a relative underperformance as compared to the other emerging markets. (Mr. Amrith Mukkamala)” Mr. Pradeep Rajagopalan suggests that rather than viewing the GCC markets as a whole, he would view it as a “barbell with some companies doing very well and some companies posting steep declines”, given that in many markets, it is a select number of companies which drive overall market performance, it would be more prudent for investors to take specific calls on undervalued firms, irrespective of country.
Nearly all analysts noted healthy crude oil prices as a driver for growth in 2010, with an expectation that crude oil prices will remain in the USD 60-80 range, however, Mr. Amrith Mukkamala, points out that the impact of such a range would be neutral for markets. Mr. Raghu Mandagolathur, agrees, noting that “the issue no longer rests with just oil price” and that the GCC is paying a high price for turning a blind eye to “much needed reforms in virtually every aspect of market functioning.” The current financial crisis has thoroughly exposed the gaps and weak spots throughout the GCC. He notes that “lack of CMA, corporate governance failures, family group defaults, banking failures, real estate meltdown, project cancellations, etc loom so large that a mere normal oil price scenario is just not enough to lift spirits.” Strong crude oil prices will undoubtedly strengthen government coffers; however, “successfully transmitting them down the line will need enormous straightening up on many fronts.”
In closing, our analysts believe that recovery will likely be patchy in 2010, Mr. Roshan Chutkey, who tracks international markets, believes that asset managers ought to lower allocation to the GCC in 2010 in favor of other emerging economies, noting that the GCC may provide some 2011 stories, but that he expects the region to be a laggard in 2010 as well. Mr. Raghu Mandagolathur points out that “the reasons why GCC markets underperformed emerging markets in 2009 will still be in force during 2010. Unless oil breaks out to frenzy levels (say above USD150/b), the GCC markets may deliver yet another year of normal returns (defined as anything between 10% to 20%).”
- Compiled and edited by Ms. Layla Al-Ammar, Investment Analyst, Research
The Markaz Analysts Club is an initiative launched by Markaz with an aim to collate the many varied and diverse viewpoints of Markaz analysts in an informal setting in order to share with the public the depth and breadth of analyst knowledge power within Markaz. On a periodical basis, a question concerning the topic/s of the day is posed to our analysts spanning various departments within Markaz (from Real Estate to Oil & Gas to Corporate Finance etc); these analysts’ responses are then compiled into a brief opinion piece for public viewing.
Tags: GCC Markets, Markaz Analysts Club
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