2009: What can we expect ?


Bearish waves swept across the globe right from developed markets to emerging markets in 2008 . The so-called notion of “decoupling” went for a toss proving the point that globalization is here to stay, according to a new report released by Kuwait Financial Centre “Markaz”. GCC Markets The GCC markets experienced a rollercoaster ride in 2008. The first half of the year was characterized by a boom in property markets and high prices of oil that fuelled concerns of high inflation. However, the second half was a contrast, with crude prices plummeting 70% from their highs of USD147 per barrel in July. Property prices also crashed as the credit crisis engulfed the financial markets. Consequently, investor sentiment turned negative and the efforts of GCC governments to stimulate the economy and boost investor confidence failed.  $0$0 $0 $0The UAE markets were amongst the most affected by the credit crisis of 2008, with the DFM shedding 72.4% during the year and the ADX losing 47.5%; Saudi Arabia’s TASI index declined by 56.5%. The Kuwait Index declined 38%.

The liquidity in the markets reduced as compared to 2007. The value traded declined by 10.6% in 2008. The year that will be The report identifies seven factors that will directly impact market performance in 2009. The seven factors are: Economic parameters, Valuation attraction, Earnings growth, Investor sentiment, Geopolitical Developments, Market liquidity and Regulatory developments. The report takes into consideration five factors to ascertain economic attractiveness, which are –Real GDP Growth, Inflation, Fiscal balance as % of GDP, Current account balance as % of GDP and broad money growth (M3).

The outlook on the economic front in the GCC region is gloomy. On an overall basis, GCC is expected to record a Real GDP growth rate of 3.6%, which is significantly lower when compared historically and also to emerging markets. Qatar is the only country on which the outlook is positive for economic attractiveness. On the valuation front, taking into consideration Price to Earnings, Price to Book & Dividend Yield all the countries in GCC attract a positive rating. $0 $0$0 $0 $0This is mainly due to the fact that there has been a severe contraction in multiples in 2008 due to the GCC markets falling by almost 56%. At the current market rates all the GCC markets are trading at single digit valuations. The scenario looks dismal from an earnings growth perspective. The fall in commodity prices and the tight credit markets are expected to dent earnings growth going forward. The GCC earnings growth is expected to be at -8% for 2008 and 0% for 2009. Except Qatar and Oman, all the other markets within GCC are rated as negative from earnings growth point of view. The report uses Bayt’s consumer confidence index as a proxy to determine investor confidence. Consumer Confidence Index is survey based and reveals the economic well – being of a country. The index is tracked since 2007 and shows a declining trend till 2008. The report expects this trend to continue further taking the current job losses and increasing losses of companies into consideration. Among the tracked countries, UAE shows the highest decline in the confidence index.

From a geopolitical scenario perspective, GCC countries inherently have a higher geo political risk due to its vulnerable neighbors. All the countries in the GCC are ranked between BBB and B by Economist Intelligence Unit (EIU) which indicates ratings are susceptible to change due to macro events.

UAE is the only country with a political risk rating of A and Qatar and Oman have a similar rating for Economic structure. All the GCC countries rank positive on this geo political score. From a market liquidity perspective, Saudi Arabia is ranked Neutral and rest of the markets are ranked positive. Saudi Arabia has witnessed a consistent decline in liquidity levels (value traded) in the last two years - 58% in 2007 and -23% 2008. Whereas, Qatar, Oman and Bahrain have held up even in these tough times by posting a growth in value traded, but, they contribute less to the total value traded in the GCC markets. For ascertaining the scores for regulatory development – the report takes into consideration three factors – Existence of a Capital Market Authority, Institutional investment and Foreign investment. From a regulatory stand point Qatar is ranked negative due to the absence of a Capital Market Authority, low institutional investment and low foreign investment inclusion factor. The overall scores by taking all the seven parameters into consideration shows that the authors are positive on Qatar and Oman and neutral on Saudi Arabia, Kuwait and UAE while negative on Bahrain. Investment Themes After ascertaining the directional trend of individual markets in 2009, the report goes forward in identifying five investment themes for 2009. These are – playing on volatility, Sectoral themes, value hunting, capital protection and consolidation opportunities. Playing on volatility shows the existence of a inverse relationship between volatility and returns.

It can be observed that at the beginning of 2006 the Markaz Volatility Index for Saudi Arabia (that measures the risk) hit a bottom while the index was hitting the top. And soon after the MVX started shooting up dramatically along with an appreciable fall in the Tadawul index. From a sector theme perspective the authors feel that the list of disfavored sectors outnumbers the favored ones. At the top of the favored list is Telecom (a defensive play).

Due to the significant fall in valuations in 2008, quality stocks are also selling at bargain prices. Ex-Financials and Ex-Real Estate, as these are distressed sectors in the present context the other sectors provide lot of value opportunities. Of the 461 companies taken for analysis, the value hunting exercise has resulted in a list of 21 companies diversified across region and sectors. On the Capital Protection side, the authors believe that clients would prefer to minimize down side risk in 2009. Hence, strategies that can protect capital or at least minimize losses would be favored as an investment theme for 2009. The authors favor adopting Constant Portfolio Proportion Insurance (CPPI) technique to pre-define loss limits and position asset allocation (between equities and cash) in order to drastically minimize risk. The final idea of consolidation opportunities rests on the expected scenario in Mergers and Acquisitions. The authors feel that portfolio strategies that can identify possible takeover/merger targets in distressed sectors can do well in this environment. Key questions and Answers Apart from identifying investment themes and providing a directional outlook, the report also provides answers to key questions in the minds of investors as they enter 2009. Some of the key questions that are discussed in the report are: Oil prices and their direction, possibility of GCC falling into a recession, impact on the aspirations of Dubai, Qatar and Bahrain to become global financial centers, possibility of de-pegging in currencies, corporate failures and their directional trend. The report notes that in a snap poll of experts conducted by Kuwait Financial Centre the consensus oil price has been at $ 65 for 2009.

The authors believe that economic activity in the GCC will undoubtedly weaken however the economies will nonetheless continue to expand and will not fall into a recession. About Markaz Kuwait Financial Centre 'Markaz', with total assets under management of over KD1.2 billion as of September 30, 2008, 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; and was awarded a BBB+ corporate rating by Capital Intelligence Ltd.