Post on 03-Oct-2020
Kuwait Financial Centre “Markaz” R E S E A R C H
GCC Outlook 2H13 Positive Momentum Continues
Sustained high oil prices, expansive fiscal and accommodative monetary
policies led to a strong rally in the first half of 2013, with all GCC markets
ending in green. The much awaited decision from MSCI came in June,
wherein UAE and Qatar were upgraded to emerging market status. Saudi
Arabia is expected to take cues and allow for foreign investor participation
albeit in a regulated manner. Going forward, political transitions in Qatar
and Kuwait could delay implementation of key reforms.
In our previous note in January, we adopted a Neutral view of the markets
(Table 1) mainly due to lackluster earnings expectation which
overshadowed improving market liquidity. We had adopted a Positive
stance in the case of UAE and Oman due to attractive valuations whose
downside is capped by high dividend yields (over 4%). We also expected
earnings to grow by 40% (yoy) and liquidity to improve in the case of UAE.
UAE turned out to be one of the best performing equity markets in 1H
2013; the rally was driven in part by speculation of inclusion into MSCI
Emerging market index and owing to a good set of numbers from banking
sector. Real estate sector earnings were disappointing though. On a
surprising note, Bahrain aggregate earnings surged by 41% led majorly by
Banking sector in 1Q13 (yoy basis).
Table 1: Previous Recommendations & Market performance
Saudi
Arabia Kuwait
Abu
Dhabi Dubai Qatar Oman Bahrain
January-13 Neutral Neutral Positive Positive Neutral Positive Neutral
1H 2013
Return (%) 10.2%
30.9%
& 7%* 36.9% 40.7% 10.9% 10% 11.5%
Source: Stock Exchanges, Markaz Research
*Kuwait Weighted Index return
For the rest of 2013, we turn positive on Qatar and Bahrain on expectations
of better corporate earnings and increasing liquidity in the markets. We
remain Neutral on Saudi Arabia and Kuwait due to disappointment in
earnings growth and higher market valuations.
Table 2: Current Recommendations
Title
Saudi
Arabia Kuwait Qatar Oman Bahrain
Economic Factors Positive Positive Positive Neutral Neutral
Valuation Attraction Neutral Neutral Positive Positive Positive
Earnings Growth
Potential Neutral Neutral Positive Positive Positive
Geopolitical
Developments Neutral Neutral Positive Neutral Negative
Market Liquidity Neutral Positive Neutral Positive Positive
Abu Dhabi Dubai
Overall Market
View Neutral Neutral Positive Positive Positive Positive Positive
Positive
Positive
UAE
Positive
Positive
Neutral
August 2013
Research Highlights:
Reviewing the first half of 2013 and projecting the remainder of the
year based on an assessment of various drivers that specifically
affect the performance of GCC stock markets.
Markaz Research is available
on: Bloomberg - Type “MRKZ”
Thomson Research,
Reuters Knowledge Nooz
Zawya Investor ISI Emerging markets
Capital IQ FactSet Research Connect
TheMarkets.com
M.R. Raghu CFA, FRM Head of Research
+965 2224 8280
RMandagolathur@markaz.com
N.C. Karthik Ramesh Manager - Research
+965 2224 8000 Ext: 4611
KRamesh@markaz.com
Rajesh Dheenathayalan Research Analyst
+965 2224 8000 Ext: 4608 RDheenathayalan@markaz.com
Nivas Lakshminarasimhan Trainee Analyst
+965 2224 8000 Ext: 4606 NLakshminarasimhan@markaz.com
Kuwait Financial Centre
“Markaz”
P.O. Box 23444, Safat 13095, Kuwait
Tel: +965 2224 8000
Fax: +965 2242 5828
R E S E A R C H August 2013
Kuwait Financial Centre “Markaz”
2
So what happened in 1H13?
The first half of 2013 saw all the GCC markets reacting positively due to
increase in oil prices, the resulting fiscal surpluses and infrastructure
expenditures, strong comeback of the real estate market, and improvement
in tourism sector.
The GCC countries continued to invest heavily in the non-hydrocarbon
sectors in a bid to diversify their economies. Construction and transport
sector contracts worth over USD 39bn have been awarded for projects in
the GCC, in the first half of 2013. Surge in lending and strong economic
performance in hydrocarbon producing GCC countries led to record
performance in the Banking sector, in the first half of the year. S&P revised
its outlook on Bahrain from “Negative” to “Stable”, and on Saudi Arabia
from “Stable” to “Positive”.
The highlight of the first half of the year was the long expected MSCI
upgrade of UAE and Qatar to Emerging Market status. The move is likely to
take effect in Q2 of 2014, with UAE accounting for 0.4 percent of the index
and Qatar accounting for 0.45 percent.
While the European markets remained bleak, there are indications that the
downturn appears to be moderating, with the slowest fall seen in the month
of June in more than a year. US markets staged a comeback in the first half
of the year with S&P 500 Index gaining 12.6%. Increasing consumer
confidence and encouraging economic data prompted the Federal Reserve
to announce a gradual tapering of quantitative easing.
At the beginning of 2013, we stated that the bleak global outlook will lead
to a sluggish demand for oil. Brent Crude lost 8% in the first half of the
year, due to slowdown in emerging markets and uncertainty in developed
markets. World oil demand growth for 2013 has been revised down to 0.8
million barrels per day.
All the GCC markets gained amply in the first half of 2013. GCC
heavyweight Saudi Arabia ended the first half with a 10.2% gain in the
Tadawul index. Qatar, Oman and Bahrain recorded healthy gains in the
range of 10% to 12% in 1H13. Abu Dhabi (+36.9%) and Dubai (+40.7%)
markets posted the highest gains this half, due to improvements in
corporate profitability.
Just to recap, the UAE markets ended 2012 with double-digit positive stock
market returns (Abu Dhabi +10% & Dubai +21%), the highest in the GCC.
Its economy grew at a modest 4%, corporate earnings rose 25%, and stock
market liquidity was up 25%. In 1H13, the UAE corporate earnings grew
7% YoY and market liquidity was up 111% YoY.
So what went right in 2013 for UAE?
Brent Crude lost 8% in the
first half of the year, due to
slackening demand.
Abu Dhabi and Dubai
markets posted returns of
37% and 41% respectively,
in 1H13.
R E S E A R C H August 2013
Kuwait Financial Centre “Markaz”
3
1. MSCI Upgrade
Much awaited decision came in June this year, as MSCI upgraded UAE to
emerging market status. The move which is set to happen with effect from
May 2014 provides UAE a weightage of 0.4% in the index. This is expected
to result in capital inflows to the tune of USD 370million1, enhance liquidity
and improve disclosure and corporate governance standards.
2. Strong Growth in Non-Hydrocarbon Sector
Sustained efforts by government to diversify the economy away
hydrocarbon sector have proved fruitful. Non-hydrocarbon component of
real GDP has steadily climbed over the years and now accounts for as high
as 67% in 2012. IIF notes that the non-oil exports as a share of total
exports rose from an average of 55% in 1998-2002 to 68% in 2008-2012,
the highest among oil-exporting countries in the region. Non-hydrocarbon
sector real GDP growth in 2012 was 4.1% and the same is expected to
grow by 4.5% in 20132 aided by strong growth momentum in service, trade
and tourism sectors.
3. Corporate Earnings
Aggregate corporate earning in UAE came in at USD 3.3bn implying a
growth of 66% from previous quarter. Earnings from banking sector
propped up by 63% while telecom sector registered 24% growth in Q1
2013 over 4Q 2012. Real Estate earnings for the full year (2012) came in at
USD 1.12bn against USD 275mn in 2011..
4. Market Liquidity
Market liquidity has been steadily improving over the last three years,
although the value is still far below the pre-crisis level. Liquidity in the first
half of the year surpassed the entire value traded in 2012 signifying
increased investor participation and confidence. Inclusion in the MSCI
Emerging Index is further expected to enhance liquidity.
Figure 1: Value Traded in UAE (USD bn)
Source: ZAWYA, Markaz Research
1 HSBC 2 IIF Estimates
18
139 126
151 146
67
28
15 19 26
2004 2005 2006 2007 2008 2009 2010 2011 2012 1H13
MSCI upgrade of UAE to
emerging market status is
expected to result in capital
inflows to the tune of USD
370mn.
Non-hydrocarbon component
of real GDP has steadily
climbed over the years, and
accounted for 67% in 2012.
R E S E A R C H August 2013
Kuwait Financial Centre “Markaz”
4
A. Looking Back
The overall GCC markets as measured by the S&P GCC composite index
gained 9.6% in the first half of 2013. All the markets registered handsome
double digit gains during the first half of the year; this was in part due to
sustained higher prices realization for crude oil in global markets and
expansionary fiscal policies. Dubai is the largest gainer, increasing 40.7%.
Saudi, Qatar, Oman and Bahrain markets ended the first half with 10% to
12% increase.
At the beginning of the year we were Neutral on Saudi Arabia. We
expected oil prices to soften and production to moderate. Though we
expected bank lending to improve no surprises were expected on earnings
front. Market liquidity which surged by 77% in 2012 was viewed favorably.
We were Neutral on Kuwait at the start of 2013, due to expectations of
muted economic growth on back of continuing political squabbles which
stalled economic reforms and held back government investments. Increased
market liquidity in 2012 coupled with 35% earnings growth expectation
were the positives.
Our stance was Positive on United Arab Emirates. Tourism, Airlines and
rebound in Real Estate sector was expected to aid economic growth. We
expected corporate earnings to grow by 40% for the year, with the market
trading at a P/E value of below 10 and P/B value of below 1, valuations
looked compelling at the onset of 2013.
We were Neutral on Qatar on most counts. With growth moderating due to
self-imposed moratorium on further development of its North gas fields,
LNG exports remained stagnant. Government spending on infrastructure
projects was forecasted to be robust. Market liquidity slumped by 31% in
2012. Amid widespread social unrest prevailing in MENA region, Qatar -
with highest per capita income, was viewed favorably as a safe haven.
We maintained a Positive view on Oman at the start of the year. Though
we expected the economy and corporate earnings to be moderate, we
believed downside risk was capped. Relatively higher dividend yields (at
4%) supported by moderate valuations were in favor. Market liquidity which
had tumbled for three consecutive years post global financial crisis stabilized
and grew by 4% in 2012.
Our view on Bahrain was Neutral (wavering slightly on the Negative end)
due to weak corporate earnings outlook and prevailing negative investor
sentiment. Mounting fiscal pressures, persistent geopolitical tensions, fall
out of Bahrain as financial hub and subdued economic growth were cause
of concerns. Bahrain also happens to be the only country among GCC
nations to have a fiscal deficit.
GCC markets registered
double digit gains during
the first half of the year
due to sustained higher
prices realization for crude
oil in global markets
S&P GCC composite index
gained 9.6% in the first
half of 2013.
R E S E A R C H August 2013
Kuwait Financial Centre “Markaz”
5
B. What to expect for the rest of 2013
We believe that there are host of factors that can influence the markets
during the rest of 2013. We have identified five such factors that we feel
will directly impact market performance. Based on its importance, we
provide subjective weights to each of these factors (Figure 4). An
explanatory description for all the five factors can be found in Appendix 1.
Figure 2: 5-Force Framework
Source: Markaz Research
1. Economic Parameters
The overall economic scenario is Positive for all GCC nations except Saudi
Arabia and Kuwait, on which we have Neutral view.
i. Real GDP Growth Forecast
Growth in GCC region, for 2012, moderated to 5.2% level. Subdued
demand for oil globally and the resultant slowdown in production levels, is
expected to further slowdown real GDP growth to 3.7% in 20133. Prolonged
recession in Eurozone, weak recovery in US, and slowdown in emerging
market economies is expected to lower commodity prices. Political transition
in Qatar, Kuwait and continued political tensions in Bahrain are seen as
possible reasons for growth to be moderating the region.
Growth in Saudi Arabia is expected to moderate to 4.4% in 2013 from 6.8%
experienced in 2012, due to expected decline in oil production. This is
3 IMF Estimates
Political transition in Qatar,
Kuwait and continued
political tensions in Bahrain
are seen as possible
reasons for growth to be
moderating the region.
Inflation in GCC is expected
to be moderate in 2013,
due to weak global
economy.
R E S E A R C H August 2013
Kuwait Financial Centre “Markaz”
6
further expected to moderate to about 4.1% in 2014. Kuwait‟s GDP growth
is expected to slow down sharply to 1.1% in 2013 from 5.1% in 2012 due
partly to slow investments, though this is expected to recover to 3.2%
levels in 2014 as political consensus is reached and reforms unleashed.
Qatar, which experienced high double digit growth rates over the last few
years, has expectedly dropped to 6.6% in 2012 as hydrocarbon production
stagnated. Going forward it is expected to moderate at more sustainable
levels, 2013 GDP growth is expected to be at 5.2%4.
ii. Inflation
Inflation in GCC is expected to be moderate in 2013, as most of the goods
demand could be met through imports, the cost of which is expected to be
flat due to weak global economy. Steady rise in rentals in Qatar is expected
to lead inflation to 3% in 2013 from 1.9% in 2012. While inflation in UAE is
expected to be muted due to supply overhang and depressed housing
rentals.
According to the IMF, inflation in Saudi Arabia as measured by average
consumer prices stood at 2.9%. It is expected to increase to 3.7% in 2013
and slightly moderate to 3.6% in 2014, as several housing projects initiated
in 2012 is expected to come on stream and cool off rentals. Implementation
of Nitaqat program, which calls for employing nationals in private sector,
could lead to rise in business costs.
iii. Fiscal Balance
Sustained higher price realization for oil in global market allowed GCC
countries to enhance their fiscal surplus in 2012. Expansionary fiscal policy
in the form of large scale infrastructure projects, generous subsidies and
state sponsored welfare schemes is expected to bring down the surplus.
Downside being a fall in global crude prices might strain the balances.
Bahrain is the only GCC country which slipped into deficit (-0.8%) in 2012
and it is expected to worsen to -3.1% in 2013.
iv. Current Account Balance
According to the IMF, the consolidated current account balance of the GCC
is estimated to reach 20.2% of GDP in 2013 from 23% of GDP in 2012.
Kuwait is expected to maintain the highest ratio, at 41% of GDP in 2013.
Qatar and Saudi Arabia are also expected to see healthy current account
balances of 19% and 29% respectively in 2013.
Table: 3 – Economic Parameters Summary
Overall Scores Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Economic Growth Positive Neutral Neutral Positive Neutral Neutral
Inflation Neutral Neutral Positive Neutral Positive Positive
Fiscal Balance Positive Positive Neutral Neutral Neutral Negative
Current Account Balance Positive Positive Positive Positive Neutral Positive
Qualitative Assessment Positive Positive Positive Positive Neutral Neutral
Source: Markaz research
4 IMF Estimates
Expansionary fiscal policy in
the form of large scale
infrastructure projects,
generous subsidies and
state sponsored welfare
schemes is expected to
bring down the fiscal
surplus in GCC countries.
Consolidated current
account balance of the GCC
is estimated to reach
20.2% of GDP in 2013 from
23% of GDP in 2012.
R E S E A R C H August 2013
Kuwait Financial Centre “Markaz”
7
2. Valuation Attraction
Valuations in GCC regional markets remain moderate while dividend yields
look attractive. However smaller sizes, illiquid nature, foreign ownership
limits and nascent capital markets regulation acts as a deterrent and fails to
attract institutional money.
Recent upgradation of UAE and Qatar market and subsequent inclusion into
MSCI Emerging markets (effective May 2014) would aid inflow of
institutional money into those country stocks.
Bahrain and Oman look attractive when looked at from a price earnings
ratio point of view. Bahrain trades below book value and offers a high
dividend yield of 4.8. Depressed valuation is a result of simmering political
tensions in the country and it may offer good returns in the long term once
the situation is resolved.
We are Neutral on Saudi Arabia and Kuwait, because of high P/B ratio (on
a relative basis) and higher P/E ratio (due to recent run up in the market),
respectively.
Table: 4 – Valuation Parameters Summary
P/E (TTM) Saudi Arabia Kuwait UAE Qatar Oman Bahrain
2010 16.0 20.0 11.0 12.3 12.0 12.0
2011 12.5 13.8 9.4 11.6 10.9 8.1
2012 14.1 17.9 13.2 13.6 11.6 9.8
1H13 14.2 18.7 13.6 13.1 10.6 8.4
P/B Saudi Arabia Kuwait UAE Qatar Oman Bahrain
2012 2.0 1.4 1.3 1.9 1.6 0.9
1H13 2.0 1.5 1.4 1.9 1.7 0.9
Dividend Yield (TTM) Saudi Arabia Kuwait UAE Qatar Oman Bahrain
2010 2.4 3.5 3.1 2.9 5.1 2.4
2011 3.7 3.5 4.8 3.7 4.9 5.2
2012 3.3 3.5 3.8 4.0 4.8 3.8
1H13 2.9 3.6 3.4 4.0 4.8 4.8
Qualitative Assessment
Neutral Neutral Positive Positive Positive Positive
Source: Zawya, Markaz research
Depressed valuation of
Bahrain is a result of
simmering political tensions,
but could offer good returns
in the long term once the
situation is resolved.
Inclusion of UAE and Qatar
in the MSCI Emerging
markets index, would aid in
inflow of institutional money
into their markets.
R E S E A R C H August 2013
Kuwait Financial Centre “Markaz”
8
3. Earnings Growth Potential
During 1Q13, overall earnings for GCC corporates marginally declined by
2% when compared to 1Q12. Total earnings, which came in at USD 14.3bn
was an increase of 17% over 4Q12.
Saudi Arabia dragged, due to 25% slippage in telecommunication sectorial
earnings and 9% decline in petrochemicals earnings (YoY basis). Bank
earnings remained flat at USD 2,037million. While in Kuwait, Construction
earnings tumbled 46% (YoY) and telecommunication sector earnings
declined by 29% (YoY). This was counterbalanced by real estate sector
whose earnings grew 26% (YoY). Bank earnings remained flat for the
quarter.
Bank earnings which rose by 63% and 23% (YoY basis) in 1Q13 helped
Bahrain and Oman respectively to boost the earnings figure. Construction
sector which posted earnings growth of 44% aided in the case of Oman.
UAE performance was dominated by banks and financial institutions which
grew at 19% (YoY). Real Estate Sector in UAE acted as a drag whose
earnings decreased by 24% (YoY). On overall basis earnings in UAE rose by
7% in 1Q13 compared with same period last year.
Earnings growth across sectors in Qatar enabled it to report improved
numbers. Telecommunication sector reported strong earnings growth of
17% (YoY) while Bank earnings grew by 4% (YoY) financial services
remained flat. Earnings in Real Estate sector grew by 6% (YoY).
Figure 3: Earnings Trend – GCC – Long-Term (USD mn)
Source: Thomson Reuters Eikon, Markaz Research
At the beginning of the year, we were positive on Kuwait and UAE in terms
of earnings growth and estimated full year earnings for GCC to grow by
19%. We expected real estate sector, particularly in UAE, to perform well
and drive the banking and financial sector earnings. Given the earnings
trend in first quarter and developments after that, we now become a bit
49,141
64,585
34,749 34,698
41,314
52,339
6%
31%
-46%
0%
19% 27%
-60%
-40%
-20%
0%
20%
40%
60%
80%
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2006 2007 2008 2009 2010 2011
In UAE, earnings growth
performance was dominated
by banks and financial
institutions which grew at
19% (YoY).
Earnings growth in Qatar
improved, led by the
Telecommunication sector,
which reported strong
earnings growth of 17%
(YoY)
R E S E A R C H August 2013
Kuwait Financial Centre “Markaz”
9
circumspect. Falling global commodity prices, moderation of growth in bank
lending as a fall out of economic slowdown now needs to be factored.
Based on trends emerging so far in 2013, we rate Saudi Arabia, Kuwait and
UAE as Neutral and rate the rest of the markets positive on earnings front..
Table 5: Earnings Growth Potential
Earnings Growth
Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Overall GCC
2003 64% 105% 46% 73% 0% 123% 72%
2004 48% 21% 72% 65% 150% 95% 48%
2005 45% 107% 137% 72% 26% 6% 72%
2006 16% -18% 4% 25% 18% 31% 6%
2007 7% 75% 39% 37% 49% 28% 31%
2008 -46% N.M. -15% 16% -19% -28% -46%
2009 25% N.M. -28% 26% 14% N.M. 0%
2010 33% N.M. -51% -14% 14% N.M. 19%
2011 19% -18% 119% 28% -17% 65% 27%
2012 2% 22% 25% -6% 18% -11% 6%
1Q13 YoY* -12% -16% 7% 9% 13% 41% -2%
Qualitative Assessment Neutral Neutral Neutral Positive Positive Positive
Source: Thomson Reuters Eikon, Markaz Research *Adjusting for one-off items
4. Geopolitical Developments
We have used Economist Intelligence Unit‟s (EIU) – Political Stability Risk
ratings to assess the geopolitical factor.
We retain our positive stance on Qatar and UAE; and neutral stance on
other GCC countries, except Bahrain which we rate as negative due to
prevailing political tensions.
Table 6: Political Stability Risk
Rating Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Previous D C C B D D
Current C C C B C D
Scores Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Previous 65 60 45 40 65 70
Current 60 60 45 40 60 70
Qualitative Assessment Neutral Neutral Positive Positive Neutral Negative
E=most risky; 100=most risky.
Source: EIU, Markaz Research
We retain positive stance
on Qatar and UAE; and
negative stance on Bahrain
due to prevailing political
tensions in the kingdom.
R E S E A R C H August 2013
Kuwait Financial Centre “Markaz”
10
5. Market Liquidity
Value traded in GCC closed at USD 576bn in 2012, an increase of c.63%
over the previous year. Value traded continued its upswing in 2013 after
bottoming out in 2010. Aggregate value traded in the first half of 2013
came in at USD 266bn. The increase was led by UAE, where value traded in
the first half of 2013 grew to USD 25bn surpassing the value traded for
whole year in 2012 by c.33%. Bahrain (133%), Oman (106%) and Kuwait
(71%) saw notable increase in liquidity levels in the first half of the year
compared to the previous year value for the same period.
Figure 4: Value Traded Trends (USD Bn)
Source: Zawya, Markaz Research
Given the positive YoY growth in liquidity so far this year, we have a
Positive view on the same for all the GCC markets except Qatar and Saudi
Arabia. While Qatar liquidity remained flat in the first half of the year, Saudi
Arabia contracted by c.39% from a year ago.
Table 7: Market Liquidity (Value Traded)
Saudi
Arabia Kuwait UAE Qatar Oman Bahrain
CAGR
(2001-2005) 136% 39% 214% 118% 45% 51%
Growth - 2005 133% 86% 663% 345% 85% 54%
Growth - 2006 46% -35% -9% -29% -25% 116%
Growth - 2007 -58% 103% 20% 48% 86% -39%
Growth - 2008 -23% 2% -3% 61% 70% 120%
Growth - 2009 -36% -43% -54% -47% -33% -77%
Growth - 2010 -40% -42% -58% -28% -43% -39%
Growth - 2011 44% -50% -46% 22% -24% -5%
Growth - 2012 76% 20% 25% -31% 4% 2%
1H 2013 (YoY ) -39% 71% 111% 1% 106% 133%
Qualitative Assessment Neutral Positive Positive Neutral Positive Positive Source: Zawya, Markaz Research
552
1,371
1,617
997
862
512
296 354
576
266
2004 2005 2006 2007 2008 2009 2010 2011 2012 1H13
Bahrain
Oman
Qatar
UAE
Value traded in GCC
closed at USD 576bn in
2012, an increase of
c.63% over the previous
year.
Given the positive YoY
growth in liquidity in
1H13, we have a Positive
view for all the GCC
markets except Qatar and
Saudi Arabia.
R E S E A R C H August 2013
Kuwait Financial Centre “Markaz”
11
C. Country Views
Saudi Arabia – Neutral
We maintain a Neutral outlook on Saudi Arabia for 2H13. While economic
factors continue to be positive, liquidity declined and the other factors
under consideration remained neutral. Economic activity outlook is positive
on most fronts such as GDP growth, fiscal balance and current account
balance. The kingdom‟s political stability rating improved, and expansionary
fiscal policy, with rising state and private investment, is expected to sustain
growth in the coming years.
Saudi Arabia has been the third best performer among the group of 20
leading economies, after China and India, with an average economic growth
of 6.25% in the last four years. At an estimated 6.8%, its real GDP growth
is the highest among the GCC nations in 2012. While inflation is expected to
remain level, Saudi‟s current account balances is estimated to be close to its
historical average, and its fiscal balance is projected to drop below historical
average, due to increasing government spending.
Persistent strong growth of nonhydrocarbon sectors, such as
manufacturing, construction and transportation, and their increasing
contribution to the GDP is expected to continue, with the government
inclined on structural reforms of the economy. Production of oil dipped to
9.4 million barrels per day (mbd) in the first half of this year, as compared
to 9.8 mbd in 2012, due to sluggish demand. But it is expected that
production will increase the second half of this year.
YoY earnings growth fell by 9% in 1Q13 and was valued at USD 5.9bn.
Petrochemicals major SABIC which reported earnings of USD 6.5billion fell
9.7% (YoY basis). Banking, Real Estate, Construction and Oil & Gas sectors
recorded positive earnings growth in FY2012, while the Diversified sector
fell by USD 1.1bn.
In the 1Q13, Oil & Gas sector posted a loss of USD 159mn as opposed to
USD 46mn in the 1Q12, as Rabigh Refining and Petrochemical Co declared
a loss of USD 175mn, due to emergency maintenance and repair work
caused by the blackout incident of steam, water and power generating
facilities from the provider Company RAWEC and due to the planned
maintenance work of the complex as well.
In terms of value traded, Saudi Arabia had an exceptional 2012, with a 76%
increase over 2011 value of USD 291bn. But value traded dropped 39% in
1Q13 to USD 201bn, from USD 332bn in 1Q12. With low public debt,
abundant foreign exchange and continued public and private investment
across the board, market liquidity is expected to rise over the rest of the
year.
We have a Neutral outlook on
Saudi Arabia for the rest of
2013 despite increased
economic activity
R E S E A R C H August 2013
Kuwait Financial Centre “Markaz”
12
Kuwait – Neutral
We maintain our outlook on Kuwait as Neutral for the remainder of 2013.
While economic factors and market liquidity were positive, earnings growth
and geopolitical stability remained neutral.
The IMF has forecasted a fall in real GDP growth in 2013 to 1.1%, after an
estimated growth of 5.1% in 2012. Fiscal and current account balances in
2012 were 43.3% and 40.8%, respectively, the highest in the GCC, and are
expected to fall to 33.4% and 40.8% in 2013, while inflation is projected to
rise in the coming years.
In May, the IMF raised concerns about recent wage hikes and the
consequent rising cost of retirement, which would put pressure on its public
finances.
Non-hydrocarbon activity was constrained due to delays in implementation
of Kuwait‟s five-year (2010-14) development plan, as public investment fell
behind what was budgeted in FY 2012/13. But there are indicators of
progress, such as more liquidity in the equity markets, improved bank
lending to the private sector and a recovery in the real estate market. With
oil production at near-full capacity, non-hydrocarbon sector is expected to
drive growth in the near future. Internal political uncertainity which held
back investments, should improve going forward.
In 2012, value traded increased by 20% to USD 26.1bn, while the first
quarter of 2013 witnessed USD 26bn worth of trades, which is a 71% YoY
increase. Growth in private sector lending and rising equity prices have
contributed to the trading upsurge and improved overall liquidity in the
markets.
Kuwait‟s corporate earnings dropped in the 1Q13 by 16% YoY, although it
was a 30% improvement over the performance in 4Q12. Telecom sector
witnessed a 29% slide. Zain telecom earnings fell by 28.5% (YoY) to USD
183mn while National Mobile Telecommunication earnings were down by
33% (YoY) to USD 68mn, due to tough economic conditions and increasing
competition. Real Estate sector posted a 26% YoY increase in earnings in
1Q13 led by Mabanee whose earnings surged 136% to USD 52mn (YoY).
Oil & Gas companies recorded a 9% YoY increase in earnings, with near-full
production at 2.8 million barrels per day, taking advantage of the increase
in oil prices and continued political instability in other oil-producing
countries in the MENA region.
UAE – Abu Dhabi: Positive, Dubai: Positive
We maintain our Positive outlook on Abu Dhabi and Dubai for the near-
term. The UAE scored a borderline Neutral rating in earnings growth
potential and Positive rating in all the other metrics. Market liquidity in the
first half of this year grew by 111% YoY and was valued at USD 25bn, as
compared to USD 19bn for the whole of 2012. Stable regulatory and
We maintain our Neutral
outlook for Kuwait for the
remainder of the year.
We have segregated our
UAE outlook and are
Positive on both Abu Dhabi
and Dubai.
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geopolitical outlook, low inflation and increasing current account balances
have contributed to the Positive outlook.
MSCI upgraded the UAE to Emerging Market status in June and the move is
likely to take effect in Q2 of 2014, with UAE accounting for 0.4 percent of
the index.
The UAE succeeded in strengthening its finances by curtailing spending, and
was able to reduce the break-even oil price to $74 per barrel in 2012,
thereby doubling its total fiscal surplus to 8.8% of GDP from 4.1% in 2011.
However, the IMF expressed concerns in June regarding Dubai‟s substantial
total debt of USD 142bn, which is around 102% of GDP, of which USD 35bn
is government guaranteed debt, and diminishing oil explorations, which
contribute only 2% to its GDP.
In 1Q13, UAE corporate profits increased by 66% over 4Q12 to USD 3.3bn.
Banking continued to dominate corporate profits with nearly 54% of the
country‟s earnings coming from that sector. The sector profits grew by 19%
YoY in 1Q13 to USD 1.9bn, and posted a 13% growth in 2012 with USD
6.4bn. Earnings of National Bank of Abu Dhabi surged by 35% in Q1 2013
(YoY) to US 1.4bn. While Emirates NBD and Mashreq Bank surged by
30.5% and 57% (YoY) respectively. Real Estate had an outstanding 2012
with corporate profits of USD 1.12bn, as compared to USD 275mn in 2011.
Qatar – Positive
We upgrade Qatar from a Neutral to Positive view for the rest of the year
owing to a 9% YoY increase in the earnings growth potential recorded in
1Q13. Value traded in 1H13 was 9.8bn which is a marginal 1% increase
YoY. We maintain our neutral score for market liquidity, but are positive on
all the other metrics.
With the highest investment-to-GDP ratio (both public and private
combined) in the GCC, Qatar is projected to spend about USD 225bn over
the period 2011-16 of which USD 65bn is allocated toward infrastructure
preparation for the 2022 World Cup. To further diversify its economy and to
develop its growing non-hydrocarbon sector, Qatar has subjected increases
in LNG production to a moratorium until 2015, despite which, the
hydrocarbon sector contributed 58% to the GDP in 2012.
IMF projects real GDP growth at around 5% for the next two years, on the
back of infrastructure spending and development of the non-hydrocarbon
sectors and it also expects that the inflation would increase to 3% and 4%
in 2013 and 2014, respectively, due to above average growth in money
supply as seen in the 1Q13.
MSCI upgraded Qatar to Emerging Market status in June and the move is
likely to take effect in Q2 of 2014, with Qatar accounting for 0.45 percent of
the index.
MSCI upgraded the UAE
and Qatar to Emerging
Market status in June
Qatar has subjected
increases in LNG
production to a moratorium
until 2015.
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After recording a -6% earnings growth in FY2012, Qatar registered a 9%
increase in corporate earnings YoY and 14% growth over the previous
quarter. This increase was mainly due to higher quarter earnings of
Industries Qatar (USD 700mn in 1Q13 vs. USD 524mn in 1Q12) which had
made huge gains made from joint ventures and better cost management.
Oman – Positive
We maintain our Positive outlook for Oman. Oman is positive on Valuation,
Earnings growth and Market Liquidity and is borderline Neutral on Economic
factors and Geopolitical developments. Oman registered 18% earnings
growth in 2012, as compared to -17%in 2011, and a 13% growth in 1Q13
both on YoY and QoQ bases, with earnings valued at USD 492mn. Value
traded in the first half of this year surpassed the value traded in the entire
year of 2012, indicating increasing levels of liquidity in the market.
Oman‟s geopolitical risk was upgraded to C in 2012 from D in 2011, and its
real GDP is expected to grow at 4.2% in 2013. Inflation is forecasted to rise
slightly to 3.3% in 2013, compared to an expected 2.9% in 2012.
Expansionary fiscal policy and gains in the non-oil economy will sustain
further growth in the coming years.
Oman corporate earnings increased by 13% in 1Q 2013 (yoy) led by banks
which posted earnings growth of 23%. Bank dhofar earned USD 32mn in
1Q 2013 registering an rise of 255%. Construction sector earnings
increased by 44% while telecommunications were flat, Oman
telecommunication reported earnings of USD 29mn for the quarter against
USD 30mn for the same period a year back.
Bahrain – Positive
We upgrade Bahrain from a Neutral to Positive view. Bahrain is positive on
Valuation, Earnings growth potential and Market Liquidity. Value traded in
the first half 2013 was almost 0.5bn, which is a growth of 133% on YoY
basis. Bahrain scores Neutral on Economic factors and Geopolitical
developments.
Bahrain‟s corporate profits gained 41% in 1Q13 to USD 588mn, although its
profits dropped by 11% in 2012 compared to 2011. This drop in profit was
mainly due to large losses reported by Aluminum Bahrain (USD 307mn) in
2013, with drop in revenue in Q2 and Q3 of 91mn and 248mn, respectively,
as compared to the same periods in 2011. This loss has been attributed to
lower metal prices, higher gas costs and unrealized derivative losses.
The Final Analysis
Our view on market attractiveness is summarized in the table below. As per
the five force framework assessment, we are Neutral on Saudi Arabia and
Kuwait and Positive on all other markets for the rest of the year (Table 8).
We continue to maintain
our Positive outlook for
Oman due to increases in
earnings growth and
market liquidity.
We upgrade our outlook on
Bahrain to Positive
despite negative
geopolitical developments.
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Table: 8 – Final Ranking
Title Weight
Saudi
Arabia Kuwait Qatar Oman Bahrain
Economic Factors 20% Positive Positive Positive Neutral Neutral
Valuation Attraction 20% Neutral Neutral Positive Positive Positive
Earnings Growth
Potential 25% Neutral Neutral Positive Positive Positive
Geopolitical
Developments 10% Neutral Neutral Positive Neutral Negative
Market Liquidity 25% Neutral Positive Neutral Positive Positive
100%
Abu Dhabi Dubai
Overall Market View Neutral Neutral Positive Positive Positive Positive Positive
UAE
Positive
Positive
Neutral
Positive
Positive
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Appendix 1: Key Events During 2013
January (+4.4%5)
Qatar‟s road sector is expected to witness a surge in contracts awarded, as USD 27 billion worth of
upgrades have been planned. According to MEED, spending on future projects is expected to increase, as
more than 30 highway projects would be awarded this year.
Central Bank of Bahrain announced that the monthly issue of Sukuk Al-Salam Islamic Securities for BD 18
million with a maturity of 91 days has been oversubscribed by 193%. The Sukuk matures on 24 April
2013 and offers a return of 1%
S&P has revised the outlook of Bahrain from negative to stable.
Dubai plans to create an Islamic finance council to regulate Shariah-compliant equity and fixed-income
products to boost the industry‟s role in the economy. The Director General of the Dubai Department of
Economic Development said that he wants to make Islamic finance a core industry in Dubai.
Project finance loans are set to rise almost 15% this year as contracts worth USD 159 billion, are to be
awarded across the Middle East. Project finance in the region is expected to grow from about USD35
billion in 2012 to about USD 40 billion this year because of significant infrastructure demand.
February (-0.5%)
Banks in the UAE have asked the central bank for permission to free up more money, for the real estate
and construction industries, as they seek to revive credit growth in the second-biggest Arab economy.
Qatar plans to list its new $12 billion investment firm on the local stock exchange. Qatar Holding, the
investment arm of the Qatari sovereign fund, will transfer $3 billion worth of assets into the new firm,
with a similar amount raised in an initial public offering on the Qatar Exchange.
March (+1.2%)
Oman Ministry of National Economy has reported 2012 budget with a surplus of RO 3,222 million
compared to a deficit of RO 113.2 million in 2011. It attributed the surplus to 34 per cent increase in oil
export earnings due to higher crude prices.
Oman plans to issue conventional bonds and sukuk worth OMR 200 million by the end of the current year
in line with its budget needs. This is expected to be Oman‟s first sovereign sukuk issue.
Qatar Government is in talks with UK government to participate in British Infrastructure projects worth 10
billion pounds (approx. USD 15 billion).
In the Kingdom of Saudi Arabia, the Ministry of Health has raised the budgetary allocation for its
homecare program to SR 95 million for the current year, compared to SR 70 million last year.
April (+1.7%)
Kuwaiti finance minister has said that the country plans to spend approx. USD 16-17 billion on
development projects in the current fiscal year. He also expects the economy to grow by 4.5-5 per cent
this year, which is much higher than the Reuters consensus estimate of 3.1 per cent.
The High Commission for Riyadh Development (HCRD) that monitors projects in the Riyadh province is
currently implementing 3,088 projects across sectors at a total cost of SR 278 billion.
5 S&P GCC Composite
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In the next five years Qatar could potentially overtake UAE in project markets and become the GCC‟s
second largest market as more than USD 90 billion worth of projects likely to be tendered in the coming
years, according to a MEED report.
The International Monetary Fund (IMF) has lowered its outlook for the economic growth in Middle East
and North Africa (MENA) oil-exporting countries. It has reduced the forecast to 3.25 percent in 2013 due
to a relatively weak crude demand. However, it expects oil-importing MENA countries to experience
healthier growth of 2.7 percent in 2013 compared with 1.9 percent in 2012.
Saudi Arabia's King Abdullah has ordered import of 10 million tonnes of cement to cater to the needs of
upcoming infrastructure and housing construction programs. King Abdullah has granted USD 800 million
and wants to erect three to four cement plants over the next three years.
Moody‟s placed a Stable outlook on Qatar‟s banking system, reflecting strong macro environment and
high public spending levels.
May (+3.5%)
Dubai International Airport is the world‟s busiest airport for international traffic for the first time. Official
monthly data showed Dubai recorded 5.53 million passengers, while London Heathrow witnessed 4.86
million during the same time.
Dubai was rated second most important international retail destination globally, behind London. Dubai
left behind famous destinations like Paris, Moscow and New York, which made it to the top five.
UAE announced plans to expand its broadband connectivity by unveiling its band plan for 700MHz and
launch of spectrum in 800MHz band for mobile broad band services. The move by the UAE government is
seen as an important step as broadband market in Arab countries is expected to increase by 255% by
2017, with a potential to contribute $108 billion to the GDP, between 2015 and 2025.
The foundation stone for a 270 hectare housing project for the construction of 4500 housing units was
laid in Bahrain and the project is regarded as one of the key strategic development schemes in Bahrain.
Standard & Poor's Ratings Services (S&P) has re-affirmed its long- and short-term foreign and local
currency ratings on the State of Qatar at 'AA/A-1+'; the outlook is stable. The ratings on Qatar reflect its
high economic wealth and strong fiscal and external balance sheets.
New railway projects linking the west to the east of Kingdom is expected to transform the regional
transportation landscape in Saudi Arabia by providing trade transportation through and by connecting
Jeddah Islamic Port with Riyadh and Dammam. The project is expected to have a positive impact on the
transport of the Kingdom.
GCC projects industry is expected to have another good year in 2013 as the value of contracts to be
awarded is expected to reach $1.35 trillion by year-end, significantly higher than the $ 730 billion total
last year. As per MEED data, KSA leads the region with $600 billion projects, while UAE and Kuwait are
expected to award projects worth $350 billion and $150 billion, respectively. Between Qatar, Oman, and
Bahrain, projects worth more than $250 billion are expected to be awarded this year.
June (-0.9%)
Abu Dhabi has awarded a mega contract to expand its oil output from off-shore Umm Lulu fields. Abu
Dhabi Marine Operating Company has signed Dh 2.8 billion Engineering, Procurement and Construction,
contract for Umm Lulu full field development project package-1 with the National Petroleum Construction
Company.
MSCI upgraded the UAE and Qatar to Emerging Market status this month and the move is likely to take
effect in Q2 of 2014, with UAE accounting for 0.4 percent of the index and Qatar accounting for 0.45
percent.
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Construction and transport sector contracts worth over $39 billion have been awarded for projects in the
GCC, in the first half of 2013, with Qatar Rail on top of the list of awarding clients.
Kingdom Transport Ministry has signed 55 new road projects worth SR 2.04 billion. 12 projects worth SR
919 million would be initiated in the capital city of Riyadh. While Makkah and Madinah region, projects
worth SR 153 million and SR 114 million would be initiated respectively.
The Saudi Ministry of Housing is working on a regulatory framework for public-private partnerships (PPP)
and creating an incentive package to encourage greater participation of the private sector in ending
chronic shortage in housing. According to latest statistics, almost 20 million Saudis are estimated to live
in rented accommodation, and a shortage of housing has resulted in steep increases in rental prices.
Standard & Poor‟s has revised the Saudi Arabia long-term sovereign credit rating outlook to „Positive‟
from „Stable‟. S&P had said that the growth fundamentals in the Kingdom have strengthened citing a long
track record of high and steady non-oil growth, averaging eight percent during 2005-2012, which had
contributed to overall average real GDP growth of 6.5 percent. As per S&P opinion, the improved growth
prospects for the non-oil economy will enhance the economy‟s resilience to exogenous shocks such as a
decline in oil prices.
The second phase of USD 2 billion power project in Bahrain, that aims to nearly double the amount of
power being produced is due to begin by the end of the year. According to the Minister of State for
Electricity and Water Affairs Dr Abdulhussain Mirza, the Al Dur Power Project upon completion by the end
of 2016, is expected to offer an additional 1,200 to 1,500 megawatts of power per day.
Saudi Arabia is expected to invest USD 45 billion to establish railway networks across the Kingdom. Key
Projects include Saudi Land Bridge, North-South Railway Line, Haramain High Speed Rail, Riyadh Light
Railway and Makkah Metro. The total length of these railway projects is expected to be 7,000 km. It is
expected that the number of railway passengers will increase to 3.37 million by 2014 using the existing
railway system.
Saudi Ports Authority (SPA) and King Abdul Aziz Port has plans to spend SR 3.43 billion (USD 914 million)
on port development projects in the Kingdom of Saudi Arabia to cope up with the increasing traffic at all
of the Kingdom's major seaports. Some of the developments include a new container terminal at a cost
of SR 172.5 million ($ 46 million) in Dheba Port. Similar project would be started at King Fahd Industrial
Port in Jubail at a cost of SR 142.5 million ($ 38 million), with both due for completion by 2014.
July (+5.5%)
Dubai Gold and Commodity Exchange (DGCX) launched its first equity index product, SENSEX 30 futures.
Sensex is the widely used benchmark for Indian equities and investors from MENA region can have
exposures to Indian equities through this contract.
In the first half of this year, passenger traffic in Dubai International Airport climbed 16.9 percent to 32.66
million people while freight volumes through the airport rose 3.6 percent in June to 202,077 tonnes, and
gained 10.2 percent to 1.20 million tonnes during the first half.
Kuwaitis went to the polls for the sixth time in last seven years. The earlier election was ruled out by the
top court due to legal flaws in the earlier electoral process.
In order to provide a conducive environment for GCC investors who often refrain from foreign
investments due to taxes imposed on them, the Government of Turkey excluded GCC investors from
having to pay taxes for their investments.
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Appendix 2: Markaz Five-Force Framework
1. Economic parameters
Even though this is a very broad parameter to evaluate, we have taken in
four criterions with weightings to evaluate the attractiveness of the
economy. These five parameters are mostly forward looking and the
estimates are arrived at by taking into consideration forecast data from
International Monetary Fund (IMF) in corroboration with International
Institute of Finance (IIF) and each country‟s central bank data.
a. Forecasted Real GDP Growth
b. Forecasted Inflation
c. Forecasted Fiscal balance as % of GDP
d. Forecasted Current account balance as % of GDP
2. Valuation attraction
We have considered the levels of valuation on an historical basis to arrive at
ascertaining the attractiveness of the markets. The valuation parameters
used are:
a. Price to Earnings
b. Price to Book
c. Dividend Yield
3. Earnings growth potential
Earnings growth potential provides the forecasted earnings expectation for
the year. We have arrived at these forecasts using a bottom up approach of
aggregating earnings data for companies listed in GCC stock markets.
4. Geopolitical Developments
Due to the changing nature of the geo political scenario in the region we
have used the Political Stability Risk rating provided by Economic
Intelligence Unit (EIU) to arrive at a score for geo political risk.
5. Market liquidity
Due to the change in liquidity levels in the markets post the credit crisis, we
have included this parameter to evaluate attractiveness in terms of liquidity.
We have used value traded to ascertain the same.
All the parameters are scored on a scale of 0-5, wherein 0 would mean the
lowest score implying negative assessment and 5 would mean the highest
implying positive assessment. .
We have taken in 5 criterions with weightings to evaluate the
attractiveness of the economy
R E S E A R C H August 2013
Appendix 3: Economic Factors
Real GDP Growth Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Real GDP Growth (2000-2011 Avg) % 5.3 4.9 5.9 13.0 4.9 5.6
Real GDP Growth (2012 e) % 6.8 5.1 3.9 6.6 5.0 3.9
Real GDP Growth (2013 f) % 4.4 1.1 3.1 5.2 4.2 4.2
Real GDP Growth (2014 f) % 4.2 3.1 3.6 5.0 3.5 3.3
Source: IMF
Score 4.00 3.25 3.50 4.25 3.50 3.25
Positive Neutral Neutral Positive Neutral Neutral
Inflation Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Inflation (2000-2011 Avg) annual change 2.0 3.5 4.8 4.7 2.8 1.4
Inflation (2012 e) annual change 2.9 2.9 0.7 1.9 2.9 1.2
Inflation (2013 f) annual change 3.7 3.3 1.6 3.0 3.3 2.6
Inflation (2014 f) annual change 3.6 3.8 1.9 4.0 3.3 2.1
Source: IMF
Score 3.50 3.25 4.50 3.00 4.00 4.25
Neutral Neutral Positive Neutral Positive Positive
Fiscal Balance Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Fiscal Balance (2000-2011 Avg)-% to GDP 8.4 28.5 8.3 8.0 6.1 1.1
Fiscal Balance (2012 e) -% to GDP 12.8 43.3 7.6 5.0 4.2 -0.8
Fiscal Balance (2013 f) - % to GDP 8.1 33.4 6.0 2.8 2.4 -3.1
Fiscal Balance (2014 f) - % to GDP 7.0 30.5 5.3 1.7 1.6 -
Source: IMF
Score 3.75 4.50 3.50 2.75 2.75 1.00
Positive Positive Neutral Neutral Neutral Negative
Current Account Balance Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Current Account Balance (2000-2011 Avg) - % to GDP 16.2 31.8 8.3 24.7 9.3 7.4
Current Account Balance (2012 e) - % to GDP 24.4 45.0 8.2 29.5 15.6 15.4
Current Account Balance (2013 f) - % to GDP 19.2 40.8 8.4 29.3 9.9 13.6
Current Account Balance (2014 f) - % to GDP 16.1 37.6 7.9 23.7 4.7 11.6
Source: IMF
Score 4.25 4.75 3.75 4.50 3.25 4.00
Positive Positive Positive Positive Neutral Positive
Broad Money Growth Saudi Arabia Kuwait UAE Qatar Oman Bahrain
Average (1998-2003)-% change 7.4 5.4 13.0 13.8 6.0 9.5
Average (2004-2011)-% Change 14.5 13.2 20.3 27.4 17.1 14.7
2012 16.4 7.6 4.4 22.9 10.7 6.1
1Q13 (YTD) 3.4 8.7 4.8 34.9 9.6 6.9
Source: IIF, Central Banks
Score 4.75 3.50 4.50 2.50 4.00 4.00
R E S E A R C H August 2013
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R E S E A R C H August 2013