Kuwait Financial Centre “Markaz” hosted on the 18th of January its webinar titled ‘Markaz House Views 2021: Opportunities and Outlook’, which aimed to help investors capitalize on new and emerging opportunities in 2021 amid the COVID-19 disruption. Following the webinar, Markaz published a report presenting its house views on emerging investment opportunities in 2021 regarding the various asset classes that Markaz manages.
The report addresses five key areas; namely GCC equities, GCC fixed income, GCC real estate, international real estate and international investments. The Markaz report also shares a recap on the 2020 performance, and challenges, and the 2021 outlook and opportunities to come for each of the five key areas of focus, based on Markaz’s market study and evaluations.
The 2020 performance overview for Equities in the GCC showed that it witnessed a decline early in the year following the COVID-19 pandemic. GCC markets were then able to shake off the bad start as the virus was contained following periods of lockdowns and curfews. The gradual opening of economies and positive developments related to COVID-19 vaccine led to the S&P MENA index ending 2020 with a yearly gain of 1.5%.
Markaz report stated that the improvement in the geo-political situation in the GCC works in favor of the region’s economy and non-oil stocks, where the re-opening of borders is also expected to increase trade volumes, which can be a positive for banking stocks that are a proxy for the economy as a whole in the GCC.
Markaz’s outlook for 2021 for regional Equities remains positive, as the markets would be supported by improving corporate earnings and economic recovery from the COVID-19 downturn. GCC economies are expected to recover in 2021 with expected GDP growth of 2.6%, and 3.1% in 2022 from a decline of 6.6% in 2020, driven by higher oil production and an improvement in economic activities. GCC economies are likely to return to pre-pandemic levels by 2023.
GCC Fixed Income
Markaz report stated that a year of uncertainty, mainly led by COVID-19 pandemic, also had its effect on global and regional fixed income markets. However, post a massive drop in fixed income indices across the world during March of 2020, the recovery has been fast paced and most of the indices recovered above the pre-pandemic levels.
Stability in oil prices and expected improvement in GDP growth in 2021 over 2020 reflect a stable outlook for GCC corporates. In terms of economic growth, S&P Global Ratings expects a modest economic recovery for the GCC over 2021-2023, with real GDP growth of 2.5%, after a contraction of about 6% in 2020.
The GCC bond market is expected to be an attractive asset class in 2021 and will offer a yield pick up to investors with tolerable duration and credit risk levels. The 10-year US Treasury bond yield is expected to be capped at 1%-1.25% due to commitment of Fed to maintain policy rate on hold. This is expected to raise the appeal of GCC bonds and Sukuk given the attractive yield differential between GCC sovereigns and US and other emerging markets. Markaz report added that the GCC bonds and Sukuk market proved to be resilient during uncertainties, due to real domestic demand.
GCC Real Estate
COVID-19 and the low oil price environment has led to a demand shock in the region by affecting business contraction and repatriation of expats, as shown by Markaz. The ability and willingness to spend has also been affected. In GCC real estate sector, collections, occupancy, rental rates and valuations have declined.
That said, Markaz showcased the opportunitites for regional real estate, demonstrating how the real estate prices in the GCC are currently at attractive levels. As the market cycle nears its bottom, Markaz stated that it is an opportune time for investing in distressed assets. Additionally, investing in income generating real estate generates monthly cash distributions in addition to the potential upside from going into the real estate market at the current point in the cycle.
The outlook for 2021 in the GCC real estate market is expected to stabilize over the next 6-12 months. This would most likely be followed by a recovery marking the beginning of a new cycle. In Kuwait, stable activity in residential real estate and improvement in commercial and investment sectors on the back of recovery in business environment could lend support to the sector.
International Real Estate (US and Europe)
Throughout 2020, the structural shifts and uneven impact brought about by COVID-19 pandemic have reflected particularly well in the real estate sector. While some sub-segments benefitted from the policy responses to the pandemic, the lockdowns and social distancing disadvantaged others.
In terms of opportunities, Markaz report highlighted that the impact on retail and office seems to be structural, while the impact on hotels and the hospitality sector seems to be transient, where demand is expected to return to 2019 levels over the next 3 to 5 years. The segment could yield double-digit returns as demand reverts to historic trends. The present times also provide opportunities to acquire assets at a discount or below replacement cost owing it to the challenges presented by COVID-19.
Markaz predicts that moving into 2021, much of the trends set afoot in 2020 are likely to continue. While industrial and multi-family would continue their positive trend, hospitality and office space could take time to recover, while retail might not recover to pre-pandemic levels as e-commerce continues to gain traction.
Markaz report showcased that although equity markets initially rose to record highs in early February 2020, a fall in March was witnessed as the COVID-19 outbreak spread across the globe and the situation became serious. To stabilize the markets, U.S Federal Reserve and other central banks announced monetary easing while governments announced trillions in stimulus measures. These measures helped global equity markets make a swift recovery. ‘Stay at home’ stocks aided the initial recovery in global equity markets particularly the U.S with Zoom, Peloton, Docusign, and Netflix, witnessing big gains. The ’big tech’ stocks like Apple, Amazon, Netflix, Google, Facebook and Microsoft stocks also saw huge gains. Other areas of the market that reaped the benefits of this environment included electric vehicles, clean energy and popular tech-related SPACs & IPOs.
In relation to opportunities, the emerging markets equities would be beneficiaries of a global economic upswing in 2021 led by China. They can also benefit from flat-to-weaker U.S. dollar and more stable trade policies under a Biden administration. Chinese equities look attractive as its tech-orientation allows it to benefit from structural growth trends and its professional handling of the pandemic has ensured its GDP did not contract in 2020 unlike other major economies.
Markaz continues to dedicate its efforts towards the support of the overall development of the Kuwait economy, through continuously bringing to light relevant and significant research and insights that allow for a more knowledge based discourse.