Environment & Energy | Tuesday 27 January, 2015 12:36 am |

Kuwait Financial Centre (Markaz) recently released its outlook on GCC markets for the full year of 2015. In this research report, Markaz analyses the performance of GCC stock markets in 2014 and provides an outlook for 2015 based on hydrocarbon dependency, corporate earnings potential, valuation attraction, economic factors and market liquidity, for each individual country.

GCC Outlook — 2015
The single most defining event in 2014 for the GCC market is undoubtedly a sharp plunge in oil price, completely unanticipated at the beginning of the year. Oil price plunged by 48 percent on back of rising supplies from non-OPEC producers (especially shale oil), and subdued demand growth expectations. UAE and Qatar indices were upgraded and they now form part of MSCI Emerging Index. Arabtec management debacle and geopolitical developments, especially in Iraq, spooked investors in June and this was followed by a surprising positive announcement as Saudi Arabia announced that it would be opening up their markets for direct ownership by foreign investors. IPO market in the region is on a strong revival with Saudi Arabia leading the show. The largest IPO in MENA region was witnessed this November as National Commercial Bank mopped up $6 billion. The issue was well received and oversubscribed 14 times. S&P GCC Index lost 2.5 percent for the year, a benign outcome given the volatility.

Kuwait — Neutral
Kuwait being the most dependent in the region on oil revenues, the recent OPEC decision to retain output levels and continued growth in supply from non-OPEC nations, could further exacerbate the Kuwaiti economy. The nonoil sector is expected to drive growth in Kuwait and much depends on the execution of development plans.
Tepid growth in corporate profitability, lack of public offerings and investors spotlight on other GCC markets could have weaned value traded in Kuwait market, which fell by 44 percent (YoY basis). Turnover ratio in Kuwaiti bourse stood at 22 percent in 2014.
Credit growth has remained moderate with total credit extended till September, 2014 rising by 7.7 percent against the same period last year. Private lending, though increasing, has remained soft at 5.3 percent (YoY) growth.
Going forward, Markaz Report expects banking and construction sectors to outperform due to accelerated pace of awarding contracts and as execution of the same gathers steam. It remains neutral on financial services and real estate; negative on petrochemicals and telecom.

Saudi Arabia — Neutral
Nonoil GDP growth is expected to be robust. Saudi Arabia which enjoys a favorable demographic dividend of young and a rapidly growing population has been actively pursuing various structural reforms to create job opportunities (Nitaqat Scheme) and provide housing facilities (Mortgage law).
Saudi Arabia’s corporate earnings grew by 12 percent (YoY) in the first nine months of 2014. Petrochemical industries and construction sector dragged whilst banking and financial services and telecom sector posted healthy growth. Market liquidity, as measured by the ratio of value traded by market capitalization, remained buoyant in the case of Saudi Arabian market. This could be due to a host of reasons including a revival in IPO market.
Going forward, lower price realization for oil and related products in global markets could affect petrochemical industries; earnings in labor intensive sectors, such as construction; and sectors in competitive industry, like telecom could be muted. Markaz remains positive on real estate sector, consumer goods; neutral on bank and financial services, construction and negative on petrochemical and commodities sector.

UAE — Positive
Leading economic and financial indicators, including real estate prices, Purchasing Managers Index (PMI), Credit Default Swap (CDS) spreads, airport arrivals and hotel occupancy, all point to further acceleration of economic growth. Completion of major infrastructural projects and preparations to host the World Expo in 2020 should help Dubai in maintaining its growth momentum. Continuing fiscal expansion policy, particularly in Abu Dhabi augur well for the economic outlook.
Aggregate corporate earnings for UAE in the first nine months of 2014 grew by 31 percent over the corresponding period in previous year. Such strong growth could be ascribed to higher earnings in banking, telecom and real estate sectors. Bank earnings were boosted by a strong rise in non-interest income and significant decline in loan loss provisions. Asset quality metrics have improved due to recoveries, restructuring and consistent loan growth. UAE witnessed the second highest turnover ratio in the region.
In the coming year, Markaz remains positive on banks and financial services, neutral on telecom and turn negative on real estate as we believe growth from a higher base would be hard to sustain.

Qatar — Neutral
Non-hydrocarbon sector GDP continues to be robust and is expected to grow by 11.9 percent in 2015, construction activities and infrastructure development being the key drivers. Asset prices are on the rise, though the overall inflation is expected to be moderate at 3.5 percent in 2015 amidst lack of global inflationary pressures.
Qatar’s earnings in the first nine months of 2014 grew by 4.0 percent (YoY). Prolonged shutdown of Qatar Industries due to plant maintenance had led to contraction of earnings in commodities segment by 26 percent.
In sharp contrast to other regional markets, Qatar index remained resilient with most sectors ending the year on a positive note. For 2015, Markaz remains positive on banks and real estate; neutral on financial services, construction and telecom and negative on industrials.

Oman — Neutral
Tepid earnings growth reflected in the poor performances of stock indices. Lack of gas availability affected the downstream industries which dragged down the main index. We believe the energy pressures would ease in the coming months as prospects of supply from Khazzan tight gas project brighten, however weak earnings growth has limited our expectations and we remain neutral.

Bahrain — Neutral
The persisting weakness in oil prices has made further uncertainty to the state of finances and increased their vulnerability. Economic activities in Bahrain have remained subdued. Earnings so far have been lackluster. In sharp contrast to other GCC markets, Bahrain registered a turnover ratio of mere 3 percent. Going forward, Markaz expects earnings to be flat and maintain a neutral view on the markets.