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Never Scream Sell in GCC!

Date : 13/08/2012
Author:  M.R. Raghu & Humoud Al Sabah

We have been regularly monitoring analysts’ recommendations in GCC and notice a weird trend. Most of the calls are either buy or hold. Look at the table below:
 
Table 1- Recommendations Vs the S&P GCC
 
 
Since 2010, analysts scream either a buy or hold nearly 90% of the time. In the 2.5 years of study, only during 2H 2010 the market turned reasonably positive validating the scream. In all the other cases, the market movement was totally in contrast to the scream, especially during 2H 2011 when markets tanked 8.2% while 96% of recommendations were either buy or hold. This applies even at stock specific levels. We produce below some instances where analysts steadfastly screamed buy regardless of sharp drop in share price and side way movement for a long time.
 
 
Etisalat is a classic example where analysts were screaming buy from Dhs 16 all the way to Dhs 6.5! Thereafter the stock moved sideways since the last 2 years and even then analysts still screamed buy all the way. Another good example would be First Gulf Bank.
 
 
Analysts screamed buy when the stock was quoting at Dhs 13 and they continue to yell buy till the stock tanked to Dhs 4! After this episode, we notice a string of buy recommendations and some hold recommendations while the stock moved sideways for the last 2 years.
 
 
While we did not notice buy screams for Industries Qatar at the peak of the market in 2008, we noticed several hold and buy recommendations during the last few years when the stock performance was more or less flat.
 
So, the aggregate data presented in the tables above as well as stock level calls presented clearly point to one trend: analyst’s pre disposition to scream buy or hold rather than sell. We must say here that it is quite possible that we may have missed out on some recommendations especially those research notes that are proprietary and are not freely available for public viewing. In spite of this failing, we still believe that analysts are more prone to issue a buy/hold rating on a stock in GCC than sell.
 
It is interesting to understand the psychology behind this phenomenon which we espoused in our earlier blog and we feel they still stand the test. Here is our list of reasoning:
 
1. Buy recommendations can be acted upon even by new investors (suits the agenda of sell side brokers) while sell recommendations can only be acted by those who hold them (small universe)
 
2. Sell recommendations are almost always unpopular with companies and hence will not serve investment banking needs and other favours.
 
3. Sell recommendations are not acted upon as much as buy recommendations as it means accepting a mistake. (Behavioural finance!). It is difficult to take small loss than a poor but positive return.
 
4. Analysts are well served by companies they research when they give buy recommendation. They will have more access to information (extremely critical in GCC) next time around since they are in good books of the company.
 
5. In the GCC, absence of derivatives market makes it difficult to action sell recommendations except by portfolio managers. Even where derivatives market enables one to short, since the loss on short position tends to be unlimited, it has limited application (given the risk management pressure).
 
For these reasons, we believe GCC will be a “buyers” market for some time to come.
 
M.R. Raghu, CFA
Humoud Al-Sabah

Tags:  GCC Markets, KSE, Stock Market

Ratings:
 Current rating: 0 (3 ratings)

The Relationship between Oil Price & Kuwait Index-Is it breaking?

Date : 07/04/2010
Author:  M.R. Raghu & Layla Al-Ammar

Sometime back we created this historical chart depicting oil price and Kuwait stock index since 1994. Last time when we checked this in 2008, the relationship showed a historical correlation of more than 90%. A plain look at the chart would also make one feel that they are not two different lines. (see chart)
 
 
However what caught our attention is the recent divergence between oil price and KSE Index.  While the long-term correlation (since 1994) stands at 93%, the last five years correlation is placed at 75%. A simple linear regression model (with oil price as independent variable) based on last five year’s data suggests the following:
 

Oil Price

KSE Index (Expected)

Deviation from Current Index

20

5,607

-26%

30

6,497

-14%

40

7,387

-2%

50

8,278

9%

60

9,168

21%

70

10,058

33%

80

10,949

45%

90

11,839

57%

100

12,729

68%

110

13,619

80%

120

14,510

92%


In other words, the current index (at 7562) is at a discount of nearly 45% given the current oil price of USD80. Alternatively, the current index factors an oil price of only USD40 as against the current oil price of USD80.
 
 
Has something happened to Kuwait market that the strong relationship with oil price is slowly breaking away? Or does this spell a classic market opportunity? If the former is true, then the index will never close the 30% gap. If the latter is true, a USD100 oil price would mean an index level of 12,729 (68% higher from the current level). If the current index factors an oil price of only USD40, the downside risk appears minimal. However, if the 30% gap reflects fundamental structural weakness created by the financial crisis, then we may need more and more oil price to see the index make further moves.
 
In the past a strong and increasing oil price directly resulted in increased liquidity in the banking system passing finally on to end investors in the form of loans/credit. This meant money available for speculation and trading. However, in the current scheme of things a strong oil price will still create liquidity but may not create the same “pass through” effect given the fact that banks have turned more risk averse. It may also be worth noting that there are more negative catalysts than positive ones such as the corporate issues (Agility, Investment Dar, Global, Zain etc) in addition to the regulatory/political climate which have negative implications on investor sentiment. Also, lack of transparency is an issue raising negative investor sentiment. The market always had weak transparency but investors tend to care about it less in “good times” and given that the last couple of years have been bad, lack of transparency has been more of a negative catalyst than usual Hence, in our assessment, the discount is here to stay though the extent (30%) can be debated. So pray for more oil price. 

Tags:  KSE, Oil

Ratings:
 Current rating: 3.3 (3 ratings)

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