What is left for 2009?


The GCC markets have underperformed its emerging market peers in the YTD period. A recent report released by Kuwait Financial Centre “Markaz” points out that given the relatively better economic profile enjoyed by the oil-rich region in terms of petrodollar wealth, one would expect GCC stock markets to outperform global emerging markets (GEM). However, that was not the case. GCC markets underperformed GEM by a wide margin (-28%) in what is just a second instance of underperformance during the last seven years.

The factors influencing the underperformance are:  

  1. Banking Distress: The scale of distress suffered by GCC banks was far worse than GEM.. GCC banks do not provide any forward looking guidance on the shape of things to come. Hence, investors are sitting in the fence waiting for good days to return
  2. Real Estate Distress: While real estate suffered as much distress in GCC as in GEM, the nexus between real estate and stock market is much stronger and deeper in GCC than in GEM. This nexus is refusing the take off for GCC.
  3. Weak Economics: Even after the financial crisis, GEM is still clocking decent real GDP growth (5%) while IMF forecast on GCC points to negative growth for at least three major economies in GCC.
  4. Foreign Investment: While foreign investors fled both GEM and GCC in the aftermath of financial crisis, they were quick to return to GEM but are loathe to extend the same favor to GCC. Not that the GCC markets are hugely dependent on foreign investment but they do help shore up the confidence for the local community.
  5. Oil Price: Oil price may be up 75% YTD, but a $70/b oil price still may not be enough to lift the spirits given the huge reduction in production undertaken by Opec countries. Also, the breakeven price for budgetary purposes keeps edging up all the time and is now close to $50/b.

The report provides an outlook for the rest of the year 2009 by using the seven forces framework which includes 1. Economic Factors, 2. Valuation Attraction, 3. Earnings Growth Potential, 4. Investor Sentiment, 5. Geopolitical Developments, 6. Market Liquidity, and 7. Regulatory Developments.

Economic Factors: GDP Growth: According to the latest economic forecasts, Real GDP growth across the GCC is likely to drop to roughly 2.45% in 2009. The IMF in its April 2009 update has revised its forecasts again. Economic forecasts now point to a year of negative GDP growth for Saudi Arabia, Kuwait, and the UAE, at -0.9%, -1.1%, and -0.6%, respectively.

Inflation: Inflation is expected to fall across the board as slower economic activity depresses prices. The largest decline in annual inflation is expected to be in the UAE from an estimated 11.5% in 2008 to just 2% in 2009, based on IMF data.

Fiscal Deficits: Fiscal deficits for 2009 have been announced across the board, except in the case of the UAE which has released a balanced budget for the coming year.

Current Account Balance: Current account balances as a percentage of GDP are expected to decline significantly across the board. The largest decline is expected in the UAE, with current account balance expected to fall to -6% of GDP.

Broad Money Growth: Money supply growth slowed noticeably in 2008, and has declined further for most of the GCC in the first half of 2009. Qatar’s money supply contracted 3% in the first half of the year while Bahrain was flat. The only country sustaining money supply growth is Kuwait, where broad money growth in the first half of the year came in at 14%.

In terms of a score for economic parameters, all the GCC countries are rates Neutral except for Kuwait, which is rated positive.

Valuation Attraction: The earnings growth in 2009 is expected to be low, this has resulted in stretched valuations in certain pockets of GCC. In a Jan 2009 report, Markaz had rated all the markets in the GCC as positive mainly due to single digit valuations at that point in time. In this review, the research note has downgraded all the GCC markets Ex-Bahrain in terms of valuations. The highest expansion has come in Kuwait, where expected 2009 PE is at 16x versus just 7x for 2008. Ex-Kuwait and Bahrain the rest of markets are rated Neutral. Kuwait is rated as Negative and Bahrain as positive.

Earnings growth potential: Due to the significant fall in Q408, the overall GCC earnings growth for 2008 came in at -43%. For 2009, earnings growth of 0% was expected this has been revised to +1%. A turnaround in earnings growth is expected for Kuwait owing to severe losses posted in 2008, Saudi Arabia is expected to show growth of 12% in earnings. Declining corporate earnings are expected in the UAE and Qatar, to the tune of 33% and 12%, respectively. The research rates positive on earnings growth rate for Saudi Arabia and Kuwait. Negative on UAE and Bahrain and Neutral on Qatar and Oman.

Market Liquidity: Continuing a declining trend which started in 2007, total value traded declined 14% in 2008 to USD 860 bn. On a YTD basis, liquidity continues to decline, with all the markets showing a fall in value traded. Total value traded for the GCC is at USD 345 bn YTD. In Saudi Arabia, value traded is at USD 237 bn, down 39% YTD from the same period in 2008. The YTD declines in Kuwait and the UAE are at 45% and 67%, respectively.  Ex-UAE and Bahrain, the rest of the markets are rated Neutral. UAE and Bahrain are rated as negative. (For rest of the parameters and a detailed explanation of the seven forces framework refer to the report online at www.markaz.com/research)

At an overall level the report rates Saudi Arabia, Kuwait and Oman as Positive. UAE and Qatar as Neutral and Bahrain as Negative.

Kuwait Financial Centre S.A.K. "Markaz", with total assets under management of over KD 900 million (USD 3.1 Billion) as of June 30, 2009, 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.