August 2013 GCC Outlook 2H13content.argaam.com.s3-external-3.amazonaws.com/8b9296e7-08a5 … ·...

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

[email protected]

N.C. Karthik Ramesh Manager - Research

+965 2224 8000 Ext: 4611

[email protected]

Rajesh Dheenathayalan Research Analyst

+965 2224 8000 Ext: 4608 [email protected]

Nivas Lakshminarasimhan Trainee Analyst

+965 2224 8000 Ext: 4606 [email protected]

Kuwait Financial Centre

“Markaz”

P.O. Box 23444, Safat 13095, Kuwait

Tel: +965 2224 8000

Fax: +965 2242 5828

http://www.e-marmore.com/offeroffering/65/1434/offering/gcc-outlook-2013/

http://www.markaz.com/DesktopModules/CRD/Attachments/Whattoexpectin2012-MarkazResearch-January2012.pdf

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.



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.



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.



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.



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.



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.



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)



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.



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.



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



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.



13

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.



14

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.



15

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



16

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



17

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.



18

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.



19

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


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


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