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Markaz: Full year earnings for GCC region in 2014 estimated at 12% 22 - Jan - 2014

Kuwait Financial Centre “Markaz” recently released its outlook on GCC markets for the full year of 2014. In this research report, Markaz analyses the performance of GCC stock markets in 2013 and provides an outlook for 2014 based on earnings potential, market liquidity, valuation attraction, economic factors and geopolitical developments, for each individual country.

The report expects full year earnings in 2013 to grow by 10% for GCC region. Going into 2014, we believe real estate sector would be the driving factor underpinned by banking and financial services. Petrochemicals sector is expected to remain muted in 2014. Corporate earnings which have been moderate for the past years in Saudi Arabia and Qatar could surprise on the positive side in 2014. We estimate full year earnings for GCC region in 2014 to be at 12%.

“At the end of first half of 2013, we had neutral views on Saudi Arabia and Kuwait and positive views on UAE, Qatar, Oman and Bahrain. We were mostly right except for Saudi Arabia, which rallied higher as talks of regulatory reforms to open up the equity market for foreign investor’s direct participation boosted sentiments. UAE markets, Dubai and Abu Dhabi, though positive surpassed our expectations” states the report.

GCC markets had a phenomenal year with most markets registering double digit gains in 2013. Performance of GCC markets was on par with developed markets and better than emerging markets. The S&P GCC Composite index closed at 118.6, gaining 24.4% in 2013.

UAE markets hogged the limelight in part due to inclusion in ‘MSCI Emerging Index’, with Dubai index producing stellar returns of 107.7% and Abu Dhabi index registering strong gain of 63.1% in 2013. Strong expansion in P/E multiple amidst robust earnings growth on the back of healthy rebound in real estate markets and revival of business confidence sustained the rally. Qatar stock index which was also included in the ‘MSCI Emerging Market’ index returned 24% in 2013. GCC heavyweight, Saudi Arabia ended the year with a 31% gain. Oman and Bahrain recorded healthy gains in the range of 17% to 18% in 2013.  In Kuwait, while KSE price index delivered a gain of 27.2% Kuwait weighted index returned 8.4%.

The highlight of 2013 was the long expected MSCI upgrade of UAE and Qatar to Emerging Market status. The move is likely to take effect in Q2 of 2014, with UAE accounting for 0.4 percent of the index and Qatar accounting for 0.45 percent. Introduction of mortgage law in Saudi Arabia; market friendly initiatives taken by new CMA head, including synchronizing Saudi market timings in-line with other GCC markets and review of subsidies program in Kuwait to rationalize expenditures and ensure sustainability of fiscal policy for the long-term were significant positive developments.

Economic growth in GCC is expected to sustain at 4% in 2014, driven largely by social spending, initiation of infrastructure projects and large-scale subsidies amidst unrest in neighboring nations. Increasing oil production elsewhere and easing of sanctions in Iran is further expected to put downward pressures on global oil price. With most GCC nations holding back their investments to ramp up production capacity, oil-based real GDP growth is expected to slump from 5.4% in 2012 to 0.4% in 2013.

Though the breakeven price of oil is still much lower than the prevailing market price, the rates at which the breakeven price had increased over the past two years is alarming, particularly in the case of Kuwait (32.6%), Qatar (44.2%) and Oman (19%). Ongoing shale gas revolution in US, slowdown in commodity super cycle and a sluggish global outlook presents immense challenges for GCC region which has been excessively reliant on oil receipts to fund their economy in the long-term.

Inflation in GCC is expected to rise only marginally from 2013 levels, as commodity prices (especially food) are relatively benign. Fiscal surplus though robust is expected to be on the declining trend, as government expenditures keep raising while oil revenues remain moderate. Valuation, on a standalone basis, remains cheap in Oman and Bahrain. Though UAE witnessed a strong rally, its P/E multiple when viewed in conjunction with expected earnings growth remains attractive.

 Outlook for GCC in 2014

Title

KSA

Kuwait

UAE

Qatar

Oman

Bahrain

Economic Factors

Positive

Neutral

Positive

Positive

Neutral

Neutral

Valuation Attraction

Neutral

Neutral

Positive

Neutral

Positive

Positive

Earnings Growth Potential

Neutral

Positive

Positive

Neutral

Neutral

Neutral

Geopolitical Developments

Neutral

Neutral

Positive

Positive

Neutral

Negative

Market Liquidity

Negative

Neutral

Positive

Neutral

Positive

Positive

Overall Market View

Neutral

Neutral

Positive

Neutral

Neutral

Neutral



 

About Kuwait Financial Centre “Markaz”

Kuwait Financial Centre K.P.S.C “Markaz”, with total assets under management of over KD 1.04 billion as of September 30, 201 3 , was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997.