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Marmore MENA Intelligence, a subsidiary of Kuwait Financial Centre “Markaz”, recently released its outlook on GCC Stock & Debt Markets for the full year of 2018. In this research report, Marmore analyses the performance of GCC stock & debt markets in 2017 and provides an outlook for 2018 based on economic factors, corporate earnings potential, valuation attraction, market liquidity and financing needs, for each individual country.
Despite the strengthening global economy, the 2018 outlook for the GCC region remains muted mainly owing to the adjustments to the low oil price. While we continue to be negative on Qatar and Bahrain, we remain neutral on all other GCC markets. Among the evaluation factors, market liquidity is the weakest link for all GCC markets with multi year lows. Efforts to prop up liquidity has failed so far. The spill-overs from the low oil price environment and resulting fiscal adjustments continue to weigh down the non-oil growth in the region. Though the oil price recovered during 2017, the fiscal consolidation efforts and subdued business sentiment, sovereign ratings downgrade, along with increasing geopolitical risk on account of Qatar’s diplomatic crisis with Saudi Arabia, UAE and Bahrain and Saudi Arabia corruption purge in the region were some of the major themes that influenced the regional economies and stock market performance in 2017.
Kuwait – Neutral
Kuwait turned out to the star performer in the region, with Kuwait Price Index closing 11.5% up, while Kuwait Weighted Index gained 5.6% during 2017. The market enjoyed its strong performance in the first half of the year, in anticipation of the country’s elevation to secondary emerging market in FTSE Russell’s indexes. Additionally, private consumption started recovering in 2017, resulting in improved confidence. The same has reflected in the 9month corporate earnings which increased by 16% to USD 4.5bn in 2017 compared to USD 3.8bn in 2016.
In terms of valuation, Kuwait is trading at a Price-to-Earnings (P/E) ratio of 15.2 only lower to Saudi Arabia in the region. Kuwait has been enjoying a multi-year high level of participation from the foreign institutions and GCC investors. This we believe could have led to some overheating of the Kuwaiti market resulting in high valuation.
Kuwait announced its entry into the international bond market scene in 2017 with two bond offerings and priced them competitively against other GCC sovereigns. Kuwait’s issuance came in two tranches – a USD 3.5 billion, 5-year tranche priced at 75 basis points (bps) over equivalent U.S treasuries and a USD 4.5 billion, 10-year tranche priced at 100 bps over U.S treasuries.
Saudi Arabia – Neutral
During 2017, the market rose marginally by 0.2% to close at 7,226, compared to the gain of 4.4% during 2016. This lackluster performance materialized despite elevated oil prices. Crude oil benchmark, IPE Brent rose by 17.7% in 2017. Sectorial heavy weights such as energy and telecom remained in the red registering declines of around 14% and 15%, respectively, while banks remained in the positive territory at 8.2% in 2017.
Profitability edged higher in the Q3, 2017 rising by around 19% Y/Y and 28% Q/Q for Saudi corporates, making it the highest quarterly earnings since Q2 2014. Optimism on Saudi Arabian stocks was high ahead of the decision by index providers, MSCI and FTSE, regarding the inclusion of KSA market into emerging markets index. However, Saudi Arabia failed to accomplish the same. MSCI is to consider adding Saudi Arabia to key index during 2019. Saudi Arabia continued to lead the way for IPO activity in the region, with an increasing number of Real Estate Investment Trusts (REITs) being listed. Including both Tadawul and Parallel Market (NOMU), there were 18 IPOs, raising approximately USD 1.2bn in 2017.
Saudi Arabia's 2018 budget may be its largest ever, as the Kingdom is prepared to increase spending to record levels next year to USD 261 billion. However, the positive outcome of the spending would largely depend on the quality of spending. Despite the expansionary spending the economy is expected to grow at a slower pace. The introduction of VAT is expected to have inflationary effect on the economy and consumption could take a hit, affecting the earnings potential of the companies. Moreover, in terms of valuation, the current support provided by domestic institutional investors backed by Public Investment Fund, has held the market from receding. We opine, the current valuation of the Saudi Arabia market is at premium and doesn’t reflect the investor sentiment, given the uncertain growth outlook.
Out of the six GCC nations, Saudi Arabia undoubtedly has issued the most number of debt issues in 2017 totaling USD 12.5bn on the international market. Saudi Arabian authorities have hinted that they plan to raise most of their funds through the domestic route and only the remainder from international issuances. These debt issuances are expected to keep at bay the extreme drawdowns on the government’s foreign reserves; it fell by almost 29% in 2016 but looks to be on stabilizing path in 2017 with the international issuances. "Press Release"
UAE – Neutral
In 2017, Dubai and Abu Dhabi stock markets lost 4.6% and 3.3%, respectively. Almost all sector indices on Abu Dhabi and Dubai closed negatively with the exception of banking, services and insurance indices in Dubai, which were marginally positive. Consumer staples, telecommunications and real estate & construction sector indices across Dubai and Abu Dhabi were the top decliners during 2017.
For the nine months of 2017, corporate earnings were up by 2% compared to the nine months in 2016. In 2018, UAE’s GDP growth is expected to recover marginally, supported largely by the growth in the non-hydrocarbon sector. The expected improvement in oil prices and its positive effects on the sentiment and financial conditions, dampen the negative effects of fiscal consolidation. Moreover, the megaproject implementation speeds ahead of Dubai’s hosting of Expo 2020.
Implementation of VAT is not expected to adversely affect growth, but will increase revenues by 1% of GDP (according to the Minister of Economy). These challenges are expected to restrain the corporate profitability. Though the UAE markets are relatively cheap and are currently trading at a discount to both EM and MENA, we believe there is absence of catalysts for the market.
Abu Dhabi sold its first ever 30 year sovereign bond in October, 2017 joining the list of GCC countries, with the exception of Kuwait to have a bond curve that goes beyond the ten year term. The initial pricing of the bonds suggested that they were generous considering that it planned to issue the bonds at a premium of 10 and 15 points over its existing 2021 and 2026 bonds.
Qatar – Negative
The diplomatic crisis in the Arabian Gulf region that has affected Qatar’s economy shows no signs of abating. Given the close trade and deep geographical links with the rest of the GCC, the severance of diplomatic relationship has resulted in economic repercussions for Qatar. The same is reflected in the performance of the country’s equity market, which declined by 18.3% during 2017, and a similar trend was observed across all sector indices. Qatar transportation, insurance and industrial indices lost 31%, 22% and 21% respectively and were among the top decliners during the year. However, despite the challenging operating environment, the banking industry was able to attain a 3% increase in net profit for the 9 months of 2017 compared to 2016.
The ongoing diplomatic crisis is one the major concern for Qatar. In 2018, the construction sector is expected to drive the growth in the non-hydrocarbon sector, offering large opportunities for investment in projects related to the 2022 FIFA World Cup. Qatari shares are set to start the next year near their cheapest levels relative to emerging-market peers since early 2010, after the rout due to the ongoing crisis. Qatar "Press Release" has managed to avert severe economic repercussions by dipping into its financial reserves and expanding its dealings with Iran and Turkey.
With Qatar being one of the poor performing markets of 2017, value has clearly opened up, but we think that a lasting recovery in this market is unlikely until the political outlook in the Gulf has improved. Moreover, though the Government would support economic growth, overall slow-down in the economic activity is expected in 2018. This would have an adverse impact on the profitability of the companies.
Qatar was notably absent from international bond owing to the ongoing diplomatic crisis in the region.
Major themes in debt issuances in the GCC region
Debt Management Offices – A great institutional step
GCC governments have been active in setting up Debt Management Offices (DMO) in order to better understand and service their debt obligations. Hitherto, the role of issuing debt, servicing them and repaying them were all taken care of by the respective central banks. While that might have worked when the debt were minimal, a specialist DMO is required in order to manage them by establishing a separate, independent entity that is in charge of the debt management to avoid the burden on the central banks. GCC countries have established a Debt Management Office (DMO) that is independent but act according to the limits set by the finance ministry.
GCC debt market offers a good place to hunt for yields
Bond investors across the globe have been left high and dry over the past few years driven by ultra-low interest rates. The current scenario is a result of the consorted efforts by Central banks around the world to pump in low cost money in order to invigorate their respective economies. After a long hiatus the Fed has decided to increase rates very gradually in the US starting second half of 2016, however other important markets such as the UK, Eurozone and Japan continue to have abysmally low levels of bond yields. This has created a dearth of investment opportunities for bond investors. Only recently has there been a talk of Eurozone economies ending their QE program in the second half of 2018.The desperation to invest in better yielding quality papers has wooed investors towards the emerging bond markets of the GCC.
Looking ahead, GCC countries’ ambitious spending plans ensure a continued need for bond issuance. The GCC faces high infrastructure project spending requirements at USD 120-150bn annually (including transport-related projects) over the next two years. Saudi Arabia’s ‘Vision 2030’ program has huge infrastructure needs, but there are also sizeable infrastructure projects taking place in Qatar in relation to the 2022 football World Cup, as well as those relating to the Dubai Expo 2020, whilst other GCC countries such as Bahrain are looking to promote infrastructure as a way to boost economic growth.
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Established in 2010, Marmore is a research subsidiary of Markaz, an Investment Bank and Asset Management Company with more than 40 years of experience. Marmore caters to the growing research and information needs of organizations in the MENA region.
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