Weekly Equity Comment – 06 November 2017
The GCC region remains volatile and continues to be impacted on the macro and political front. Last week the IMF updated its regional outlook for the Middle East, although growth concerns remain, IMF forecasts highlight fiscal initiatives with oil break-evens mostly falling. Kuwait remains best positioned in the current environment but the recent uptick in oil prices will help to further reduce deficits for Saudi and the UAE. Oman and Bahrain remain laggards with both needing further adjustments to ensure sustainable spending policies. With oil prices moving higher, rebalancing in oil markets is progressing well with a decline in US oil inventory on the back of maintenance, hurricane disruptions and better demand. Slower than expected ramp-up of shale and non-OPEC projects have also supported oil prices. The break-even oil price for Saudi is now close to USD 70 per barrel, as compared to USD 96 per barrel two years ago.
Saudi Arabia has seen a recent anti-corruption drive result in the arrest of number of ministers and high profile princes, whilst this may be negative in the short term for market sentiment it sets the stage for improved governance going forward. Post the event the Saudi equity market opened sharply lower before recovering to close in positive territory. The arrests were approved by an anti-corruption committee headed by Crown Prince Mohammad Bin Salman. The anti-corruption drive snared former political figures and led to replacement of head of the national guard and head of naval forces as well as the high profile Prince Alwaleed Bin Talal Al Saud. The arrests came within two weeks of the Future Investment Initiative Conference held in Riyadh and are likely aimed at demonstrating the administration’s seriousness with regard to business ethics. That said, the crackdown, the opacity and its interpretations mean that the Saudi bourse is expected to be volatile. If austerity was a growth drag and accordingly being staggered, the recent turn of events further increases growth uncertainty.
In Kuwait new projects continue to be announced and a new parliamentary cabinet is expected to form after the previous cabinet resigned earlier this month. The events highlight the balance that the government intends to strike between austerity and public support. Kuwait continues to be one of our preferred markets.
In UAE, Emaar Development IPO as per media reports has been fully covered auguring well for the parent, the issue price range is 0.95 to 1.15 times the independent valuation performed by JLL. UAE Q3 earnings have to date been better than expectations. Overall earnings surprise in the UAE was positive 6%, aggregate net profit of companies grew by 12% YoY and 9% QoQ. In the UAE banking sector, loan growth remains weak, however, due to normalisation of provisions net profitability has increased. Emirates NBD profit increased by 37% YoY due to a decline in provisioning and Dubai Islamic bank’s profit increased by 26% YoY on better than sector credit growth. Expectations are for increased loan growth in 2018 driven by higher government spending and Expo 2020 projects. Dividend yield of UAE banks looks attractive at around 6%.
Fund & Portfolio positioning
Our funds and portfolios continue to maintain an overweight stance in UAE, Kuwait and Saudi Arabia whilst remaining cautious in Qatar and Oman. We remain invested in a range of high conviction equities, however, recent market movements have caused underperformance against benchmark over the past month with GCC markets being broadly negative. Valuations remain appealing and we are of the opinion that current market weakness will lead to compelling investment opportunities.
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