Markaz GCC Investment outlook for Q2009-Bullish on fixed income


In a recently published outlook for second quarter 2009, Markaz provided its outlook for various asset classes like equity, fixed income, private equity and real estate. For equities, the report had a neutral view. This is because of earnings weakness to continue along with weak liquidity. However, the good point is the cooling off in volatility along with some sort of macroeconomic stability, especially inflation. As for the other asset classes, bonds look to be the most interesting asset class for the moment. The report states that the market is flooded with mouth watering yields (albeit with attendant risks). However, the secondary market continues to be shallow. Also, the GCC private equity market is helped by low financing cost as well as great bargain hunts. However, liquidity is a concern. The real estate outlook is negative due to weak demand while supply is bountiful. The report notes that banks will shy away from lending at least for some time.

Summary of ratings
Equities Fixed Income Private Equity Real Estate
GCC Neutral Positive Neutral Negative
Note: For complete component wise ratings and a detailed discussion in each asset class refer to the Q209 Investment outlook report on
GCC Equities

The overall earnings for GCC for Q408 was a loss of USD 13 Bn as compared to a profit of USD 14 Bn on a YoY basis. For the full year 2008, the numbers indicate a negative growth of 39%. The factors that are affecting the overall earnings growth are a steep decline in earnings in the financial services segment due to massive write downs and mark to market losses, real estate segment due to price and demand decline and the commodity segment due to price and volume decline. Among the six GCC countries, the worst affected in 2008 was Kuwait with a decline in earnings by 96%

Earnings Trend – GCC
USD Mn Q4-07 Q4-08 YoY 2007 2008 YoY
Saudi Arabia 5022 -6316 NA 22533 12449 -45
Kuwait 2544 -7826 NA 13320 560 -96
UAE 4293 193 -95 13551 13483 0
Qatar 1663 1169 -30 5767 7544 31
Bahrain 537 -271 NA 2444 872 -64
Oman 506 15 -97 1551 1307 -16
GCC 14566 -13036 NA 59165 36215 -39

Source: Company fillings, Zawya Investor, Markaz Research

Note: For a detailed discussion on earnings visit

Going forward, Qatar is expected to post some revival in earnings on a QoQ basis as majority of the earnings are from commodity driven companies and there has been a modest turnaround in commodity prices as compared to the Dec 08 quarter. Saudi Arabia is rated negative on earnings. The commodity related story in Saudi Arabia is continuing to witness significant weakness. Sabic’s 1Q09 numbers were worse than expectations. The Q109 loss was at USD 0.26 Bn with the operating profit declining by 96% on a YoY basis. The banking, real estate and the rest of the financial sector will continue to be pressurized.

On the liquidity front, the aggregate value traded level has seen a 20% decline on a QoQ basis in Q109 and a YoY decline of 63%. Liquidity levels are rated negative across the region for Q209, as clients continue to face difficulty in obtaining leverage to trade. Kuwait and Qatar are rated neutral and on an overall basis for the liquidity for GCC is rated negative.

Valuation levels across GCC have witnessed significant declines. The price to earnings taking the trailing twelve month earnings into consideration looks comparable with emerging market peers for most of the GCC markets. Due to the decline in price levels, the dividend yield of the markets is also looking attractive at an average 6.52% for the GCC markets. Except for Kuwait and Bahrain, the rest of the GCC markets are rated positive on the valuation levels. Saudi Arabia is rated neutral.

Valuation snapshot – GCC markets
Country Market Cap (USD Bn) PE (x) PB (x) Dividend Yield % % Change YTD
Saudi Arabia 237 12.61 1.92 4.84 -2
Kuwait 89 10.19 2.08 7.91 -12
UAE 93 8.60 1.72 4.70 NA
Qatar 40 7.25 1.65 8.73 -29
Bahrain 17 18.07 1.28 5.92 -10.75
Oman 10 9.02 2.27 7.00 -12
Source: Reuters 3000xtra, Markaz research

Risk levels as characterized Markaz Volatility Index shows significant reductions as compared to its historic highs witnessed in October. At a GCC level, the risk levels witnessed a decline of 60% from its peak in Oct 08. On a QoQ basis too, all the GCC markets ex-Qatar have witnessed a reduction in risk levels with Oman and Bahrain leading the pack.

Most of the markets are expected to witness significantly lower GDP growth rates as compared to 2008. However, there has been a significant decline in inflation rates too. Also, all the central banks in the region ex-Qatar have slashed their interest rates to provide a fillip to their respective economies. The recent efforts of the regional central bankers and Sovereign Wealth funds like Kuwait, Qatar, UAE and Saudi Arabia by either cutting interest rates, announcing fiscal stimulus packages, buying stakes of banks in the secondary markets provide a cushion to the fall in the economic growth. All the GCC economies Ex-Saudi Arabia and Bahrain are rated as neutral. Saudi Arabia is rated positive and Bahrain is rated negative for macro economic scenario.

GCC Fixed Income

According to the report, 2009 may present an opportunity for significant changes and growth in the Sukuk market.

The boom of recent years fostered an increasing interest rate environment mainly in order to contain inflationary pressures in the economies of the GCC. However, the global financial fall-out has brought that boom to a halt and GCC economies are currently in a declining interest rate mode in order to spur economic growth and encourage spending. The report expects a declining interest rate environment to attract a surge of Sukuk sales in the near-intermediate term as yields become more attractive.

An expectation of increased sovereign participation in the GCC debt market, Qatar and the UAE have announced large-scale debt programs, has already filtered into the CDS market, as most 5-yr Sovereign CDS spreads have narrowed in the past month after widening in late 2008 and the first two months of 2009. The largest decline has been in Qatar’s 5-yr CDS spread, which has tightened to roughly 250 bps from over 300 bps in February 2009.

Average Current Yields on what the report categorizes as “High Octane” Sukuks (those with yields of over 20%) is currently at 41.7%, more than 4x higher than current yields of what the report terms as “Moderately Aggressive” Sukuks (with yields between 5%-20%), which have averaged 10% in 1Q2009. Average Current Yields on “Conservative” Sukuks (those currently yielding less than 5%) stands at 3.74%.

The majority of Sukuks fall into the “Moderately Aggressive” category, i.e. yielding between 5%-20%, followed by “High Octane” Sukuks, which have yields above 20%. A small number of the Sukuks are of a “Conservative” nature, i.e. with yields less than 5%, including the ADIB Sukuk, which is highly rated by both Fitch and Moody’s.

Accumulated oil revenues may provide a cushion for sovereign entities in the GCC through 2009, but should oil prices remain subdued in the longer term, and a more drawn-out economic downturn ensue, the one would expect to see a jump in sovereign Sukuk issuances as the GCC states attempt to push forward with large-scale infrastructure projects and, in some case, plug budget deficits in the face of dampened oil prices. The governments of Qatar and the UAE have already announced large-scale debt programs.

After the particularly painful, and wealth shattering, fourth quarter of 2008, investors in the GCC are taking a wait-and-see approach to investing and are more likely to place funds in government-backed issues rather than corporate Sukuks. The report notes that there is currently a high level of risk aversion among investors, but would expect demand to pick up towards the second half of 2009.

Some analysts believe that global Sukuk issuances could more than double in 2009, with approximately USD 39 bn in the pipeline, of which the GCC is slated to provide roughly two-thirds, while other analysts predict that global issuances are not likely to exceed even a “couple of billion” dollars. The report feels that such a negative outcome will not occur; having said that, the author does not foresee issuances surpassing 2007 levels either. The report expects the second quarter of 2009 to remain sluggish before picking up in the latter half of the year.

GCC Private Equity

Private Equity firms are in a unique position going into 2009. Fund raising activity was high in the past two years, with USD 6.4 bn raised in 2008, following a USD 5.8 bn raised in 2007; however, despite the fact that fundraising has been on the rise, investment activity, or deployment of capital (particularly in the region) has been low and declining with the number and size of investments shrinking 22% and 31%, respectively, in 2008.

Financial markets and economies are currently going through a state of de-leveraging whereby credit lines have tightened considerably and funding for deals has dried up. GCC governments are racing to inject liquidity into their economies by shoring up local banks, however, the report does not expect this liquidity to be funneled into private equity deals in the near term and it is anticipated that lesser known private equity houses, with less of a track record, may see their credit lines from local, and international institutions, cut off until liquidity and confidence returns to the global financial system.

The global financial meltdown of late 2008 has resulted in depressed valuations for many companies (both listed and unlisted), which may prove to be attractive investment targets for private equity firms. On the flip side, private equity firms would be able to provide financing to companies that have seen their traditional sources of funding closed off.

There have been 7 Entry transactions so far in 2009, which is on par with the same period of 2008 where 10 Entry transactions had been completed. The report expects investment activity to pick up in 2009 as Private Equity firms deploy capital on undervalued companies.

The global financial fall-out has resulted in a significant flight-to-safety for investors on a global, and regional, scale. As a result, the report expects fundraising to be difficult, if not impossible, in 2009. In the first quarter of 2008, 3 funds had closed with a total value of USD 754 mn, whereas the same has been nil for the first quarter of 2009.

The preferred mode of Exits in the GCC/MENA region has been through IPO’s due to the buoyancy of the region’s equity markets; however, the report expects these to be scarce in 2009 as equity markets continue to be unattractive for IPO’s, in addition to tight liquidity limiting the viability of trade sales.

The IPO market has ground to a near halt, with the value of IPO’s plummeting 98% in the first quarter of 2009 to USD 99 mn versus USD 4 bn in the same period of 2008.

GCC Real Estate

Vibrant economic growth and liquidity conditions in the past have resulted in an oversupply situation with the significant correction in demand expectations of late albeit with pockets of undersupply. To add to these, the reluctance to lend to RE&C sector driven by lack of confidence in the industry removes the necessary lubricants thus putting GCC real estate deep in the negative growth region on the whole.

Kuwait: Major construction projects that got completed in Q1-09 like 360 Mall (retail), Jaber al-Ahmed Township (residential) and etc will get released in the coming quarters and will be added to the supply. Slower economic activity has deeply affected rentals in general and for office space in particular which are down from an average of 15 KD/m2 in Q3-08 to 8-12KD/m2 now in Kuwait City depending on the location of the property. Properties in prime/good locations have decreased in value the least and the report expects rental rates to start going down from Q3-09 if current credit market conditions prevail.

UAE: The report has a negative outlook on UAE real estate due to the continuous uncertainties in demand expectations, especially in Dubai. Given the oversupply situation in Dubai, demand is expected to remain constrained. The construction of USD 6 bn of real estate projects were completed in the previous quarters and construction of c. USD 80 bn worth of real estate projects which were originally planned to get completed in the coming quarters will likely get delayed. Financing too remains restrictive with banks hesitating to lend to developers. Though some banks have offered renewed mortgage lending,

Saudi Arabia: Though Saudi Arabia’s lesser reliance on expat population leads to more stable internal demand generation as a result of population growth, lower economic prospects and lack of an efficient mortgage market keeps demand growth at check for residential properties. USD 2 bn worth of projects are expected to be completed in the coming quarters of which the major projects are Jeddah Towers (USD 500 mn), Le Meridien Hotel Towers(USD 450 mn), Al-Qasr Mixed-Use Development (USD 350 mn). The report has a neutral view on real estate sector in Saudi Arabia, however, the passage of the mortgage law can change market’s perspectives on the demand prospects though its timing is far from certain and the industry is getting ready to tap the opportunity provided once the law gets passed even in the current scenario with REFCO and Injaz’s announcements being the latest.

Qatar: The forthcoming supply of c.55,000 units in the coming five years will be able to maintain the current level of average residents per unit only if the population growth rate is 5% or below. Population growth over and above 6% will yield upward pressure on rentals, Dismal supply in the past, demolition of old CBD and the current pent up demand has kept the vacancy rates at very low a level and is expected to remain so in the short term.

About Kuwait Financial Centre “Markaz”

Kuwait Financial Centre S.A.K 'Markaz', with total assets under management of over KD. 880 million as of December 31, 2008 was established in 1974, and 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.