Saturday 07, January 2017 by Isla MacFarlane

Saudi Arabia leads market rally in GCC

Regional markets saw a solid performance in the last quarter of 2016, the National Bank of Kuwait (NBK) wrote in its latest economic update.

The GCC MSCI total return index advanced a notable 16 per cent on the quarter and managed to close the year up 9.5 per cent thanks to a stellar performance by the heavily weighted Saudi market in 4Q16. Other markets didn’t fare as well and some ended the quarter flat, NBK said.

Total GCC market capitalisation stood at $951 billion at the end of the quarter, having gained $106 billion during 4Q16 and $50 billion in 2016.

Regionally, the recovery in oil markets continued to provide support to GCC stocks, with equities continuing to show strong links to crude prices. OPEC’s recent agreement to cut oil output has boosted oil prices with Brent now hovering around $50/barrel, double their January 2016 low.

However, despite their recovery, NBK warns that oil prices remain relatively low and a concern for regional fiscal sustainability and growth. A prolonged period of low oil prices could force governments to further reduce capital spending and benefits, and further pressure liquidity. This has been more of a concern for investors in Saudi Arabia, Oman, and Bahrain than in other markets. 

Driven by a successful bond sale, the Saudi market put on a stellar performance in 4Q16, NBK said. The Government’s record $17.5 billion international bond sale appeared to shift sentiment in the market. The Tadawul-All-Share index was up 33 per cent qtd and closed the year up five per cent.   

According to EFG Hermes, net inflows to Saudi equities in October were $427 million compared to a monthly average of $63 million since January 2016. Markets had been concerned throughout most of 2016 about declining liquidity, delayed payments to contractors and tightening austerity.

Corporate earnings also showed signs of weakness as profits of listed companies for 9M16 were off by five per cent y/y. While the purchasing managers’ index (PMI) remained in expansionary territory, it fell to its lowest level ever in October before rebounding in November.

Kuwaiti equities registered good gains with the value-weighted index up eight per cent qtd. The long-awaited acquisition of a controlling stake in Americana by a UAE-based investor boosted sentiment. Also, corporate earnings of listed companies surprised on the upside in 9M16 despite having declined six per cent y/y.

A sample of 11 blue chip companies announced net profits 19 per cent higher than the mean estimate. Volumes were also up in 4Q16 after reaching record lows the previous months. The daily average traded value was $ 46 million in 4Q16 compared to $22 million in 3Q16.

UAE equities underperformed in 4Q16, impacted by the broader EM retrenchment. Abu Dhabi Securities Exchange (ADX) general index was up 1.6 per cent qtd and closed the year up 5.6 per cent. Meanwhile, Dubai Financial Market (DFM) general index advanced by 1.6 per cent qtd and maintained its lead for the year regionally, up 12.1 per cent. With their relatively large foreign investor base and representation in EM indices, UAE equities were hurt by the sharp EM outflows. Inflows to UAE markets in October, the last month for which this data is available, were $50 million compared to a monthly average of $165 million since January 2016.

Qatari equities lost ground early on in the quarter before bouncing back up on the OPEC deal. The Qatar Stock Exchange (QSE) general index was unchanged in 4Q16, ending the year also flat. Sentiment in Qatar has suffered on a lack of clarity regarding potential cuts in government spending and declining liquidity. Meanwhile, corporate earnings for 9M16 continued to reflect weakness with a sample of listed companies’ profits down 12 per cent compared to a year ago, the biggest decline in the region.

Foreign flows to Qatar in October were strong for the third consecutive month as money managers continued to amend portfolio allocations following the recent FTSE upgrade to ‘emerging market’ status. 

GCC remains undervalued compared to other emerging markets, according to NBK. Price-to-earnings per share (P/EPS) for global emerging markets is around 19, above P/EPS for any of the GCC markets.

Regionally, UAE equities continue to look the most under-priced among the main GCC markets especially following the rallies in Saudi and Kuwaiti in 4Q16. Saudi equities are the most expensive by that measure.  

Market liquidity increased notably in 4Q16, led by a jump in activity in the Saudi market. The daily turnover in 4Q16 averaged $1.2 billion, up by 50 per cent from 3Q16 average. The rise in sovereign bond issuances domestically since the beginning of the year had directed liquidity away from equities. With GCC governments now looking to raise debt internationally rather than just depend on domestic borrowing, activity in the equity markets might see further pick up.

GCC markets will continue to follow up on governments’ fiscal and reform plans for the coming years, as well as oil price developments. Internationally, with a new US administration, investor’s focus will be on the US in the coming few months, as they seek to ascertain the shift in key policies (monetary, fiscal, regulation, trade…) and their implications for capital markets globally. 

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