Despite a major drop in earning in 2009 that was led by large provisions taken by the banking sector and drastic reduction in petrochemical and commodity prices especially during early 2009, the relative valuation of the Mena remains attractive, according to a new report by Audi Capital, titled, Mena Equity Strategy – 2010, Active Management to Dominate in 2010.
"Given the positive outlook for oil prices and the supportive expansionary fiscal and monetary policies, we expect earnings in 2010 to rebound by at least 25 per cent offering attractive investment opportunities, when markets react to reflect such strong fundamentals," said the report.
The report pointed out that last year the global turmoil took its toll on Mena markets. "Though the problem started in the US, Mena markets were severely affected by the global crisis, but did not fully join the recovery," it said.
As far as catching up with global recovery is concerned, the authors of the report said there were many obstacles the region faced when the problems came hitting its shores and led to massive erosion of wealth.
"Mena markets had witnessed severe losses with not a single market registering a full recovery," said the report, adding that this market "is not one single bloc. Fundamentals differentiate country performance".
Pointing out factors that had drastic repercussions on the economy, the authors of the report said: "Tight debt markets and restricted credit policies by the banks in the Mena region had resulted in major problems for corporations that wanted to revolve their maturing debt in 2009."
Citing the case of Saad and Algosaibi (major family conglomerate) in Saudi Arabia, they mention that default of major family conglomerates resulted in a major shock to the Saudi banking sector as well as all major banks in the region.
"Until today the case of Saad and Algosaibi has not been settled yet, nor the exact exposure has been determined."
The report also cites concern about the debt problems of government-related entities. However, they should be seen in proper perspective, it said, adding that "though the restructuring of the debt is a major concern for all investors in the region and should not be underestimated, the issue needs to be put in proper perspective".
Despite the problems that had plagued the regional market in the past year, Audi Capital said Mena fundamentals remain strong.
Mena is rich with large oil and gas reserves and the outlook for oil is positive. There are relatively aggressive GDP growth rates, relaxed fiscal policy, coupled with huge expenditures on infrastructure projects.
Even though there was a huge pullback in the size of projects last year, mainly in the UAE, which is attributed to the crash in real estate and as access to credit has been restricted in 2009, the huge spending happening in Saudi Arabia should offset that.
"Projects in KSA are still expanding in size where a major contribution comes from the plan championed by King Abdullah to build six new cities throughout the country.
"These cities together will have four times the geographical area of Hong Kong and an economic output equal to Singapore's."
Moreover, the countries in the region had enough cash to weather storms as during the last decade Mena has managed to accumulate huge amounts of foreign reserves.
"This provides Mena governments major cushion to manage any emerging crisis."
Citing examples of their ability to repay, the authors take the case of the UAE, which paid fully $4.1 billion (Dh15.06bn) of Nakheel in December. Moreover, Abu Dhabi provided a total of $20bn support to Dubai when needed.
In Qatar, QIA has participated in the capital increase of most Qatari banks when needed. "Qatar authorities bought the real estate portfolios and the domestic equity portfolios at favourable terms from commercial banks."
Regional sovereign funds have intervened several times in the stock markets.
KSA has spent a total of $130bn in 2009 and plans to spend a similar amount in 2010. Kuwait is also launching a $62bn plan in 2010.
Focusing on the Saudi economy, the authors of the report said the largest economy in the region will play a vital role this year.
"KSA is the largest economy in Mena region and most powerful player in the global oil market with a 22 per cent share of global oil reserves and 13 per cent share of global oil production.
"Oil is key driver for the economy, supported by the current positive outlook. Massive investment spending is underway – around $500bn between 2008-2012."
The country has ample room for counter-cyclical fiscal policies given the high level of fiscal reserves that were accumulated during the previous six years. This coupled, with prudent and conservative monetary policy and strong population growth reaching around three per cent with favourable demographics should make a positive impact in the country's economy.
Despite the worldwide credit crunch, the Saudi had a record budget in 2009 and then in 2010.
"Government is confirming its expansionary fiscal policy with massive investment on infrastructure and education," said the report.
"Undoubtedly, the huge figures in the budgets over the past two years, is evidence of the confidence the leadership has in the outcomes of the economy and its ability to accommodate more, despite the shrinkage being witnessed in the global economy," Dr Muhammad Al Jasser, Governor of Sama is quoted as saying in the report.
The government's commitment to continued spending had offset the drawbacks of the limited spending by the private sector.
"Fiscal spending on infrastructure projects had counterbalanced some of the pullback by the private sector spending. The total value of projects in KSA had not changed from 2008 to 2009 and many projects that were shelved in 2009 are coming back on the table in 2010."
Throwing light on country/sector performance in Mena, the report said despite a broad-based rally, some sectors and countries have lagged others, opening the door for the opportunity of catching up soon.
"Although Qatar recorded the largest GDP growth in 2009, Qatar underperformed KSA, Egypt, and UAE markets". And within Saudi Arabia "despite the massive government spending on infrastructure-related projects, the building and construction sector under-performed the peer sectors in the country".
And, in times of crises, correlations have increased and country diversification became less of an applicable concept.
However, when the turbulence lessens, investors will again target markets with solid fundamentals, said the report.
According to the authors of the report, factors to consider include level of economic activity, fiscal and monetary policy, level of public debt and regulatory changes.
On sector allocation, the report highlighted that building and construction will benefit due to massive government spending through expansionary fiscal policy.
"[This] will benefit all companies within this sector, especially after resolving the inventory problems in 2009."
Another sector to watch out for is banking. "Having survived several consecutive shocks of different types, the banking sector in the GCC region, mainly KSA and Qatar, is expected to rebound benefiting from improved macro-economic conditions and sufficient liquidity in the system, which will be translated into increased appetite for granting loans.
Also, lower provisioning charges on the loan book as well as on the investment book will act as positive catalysts for banks' earnings.
Shipping and logistics also figures in the list as demand for vessels, whether tankers or containers, is expected to increase as the global economy is moving towards a recovery.
The supply, on the other hand, is expected to decelerate for two main reasons – ageing fleet and restrictive regulations. Thus, the combined effect will result in an impressive surge in this sector, said authors of the report.
Companies of choice
Even with the sharp plunge in oil prices, GCC countries are still taking massive investments in oil and gas sector.
Arabian Pipes Co (APC)
For example, Saudi Aramco has allocated a budget of $60 billion (Dh220.38bn) to implement oil and gas projects until 2014. This will have a positive reflection on Arabian Pipes Company (APC) since a major chunk of its operations comes from this sector.
This will ensure a good backlog for APC due to its new dimensions of pipe products and huge production of 460K tonnes of steel pipes.
Commercial Bank of Qatar
Commercial Bank of Qatar has good asset quality indicators: The bank's loan quality is acceptable with non-performing loans representing only 1.04 per cent of gross loans and they are fully provided for.
The bank is operating at good efficiency levels with a cost efficiency ratio of 25.8 per cent as of Q3 09. CBQ is well capitalized with a revised capital adequacy ratio of 12.20 per cent compared to the 10 per cent minimum set by the central bank.
Industries Qatar (IQ)
The IQ group is comprised of four companies, Qafco, Qapco, Qasco and Qafac, whose operations are focused in the fertilizer, petrochemical, steel and fuel additives markets, respectively.
The future seems bright for the company as crude oil prices are projected to rise and demand for biofuel feedstocks is expected to grow in line.
Maridive and Oil Services
The company offers oil and gas related construction and maintenance services and despite that its contracts are usually of short-term nature. MOS has secured some long -term contracts both inside and outside Egypt. The most important are a two-year, $400 million contract with Aramco in KSA and a $180 million project in India. The industry in which MOS operates is very capital intensive and this serves as a good barrier to entry for new candidates, giving it an edge.
Qatar is increasing its natural gas production and Nakilat being the main company in Qatar that transports LNG from the country to the rest of the world will benefit. The company is following an aggressive expansion plan to increase its LNG fleet size and all the vessels are long term chartered. This will assure the company a constant stream of revenues, regardless of the volatility in the shipping spot rates.
Qatar Telecom (Qtel)
Qatar Telecom (Qtel) aims to be one of the top 20 telecom companies in the world by 2020. It has expanded its operations in the past two years through significant acquisitions.
Qtel has a diverse revenue base and in the first nine months of 2009, more than 70 per cent of the company's revenues were generated from overseas subsidiaries.
Samba Financial Group
Samba has a liquid balance sheet, reflected in its loans to deposits ratio of 60.6 per cent in Q3 09. This healthy liquidity position is expected to continue in the coming years with the loans-to-deposits ratio forecasted to hover around the 64 per cent placing the bank in a better position to benefit from the next cycle of lending growth.
Sabic is one of the world's largest petrochemical producers and urea exporters. The petrochemical industry has already shown signs of a recovery, which is good for the company. The restocking of inventories, which were depleted during the economic turmoil period, has begun amid concerns that petrochemical prices might increase further on expected higher energy costs. This has resulted in consumption creeping back up.
Sorouh Real Estate
Sorouh has a diversified project portfolio where the majority of its projects strategically located within central Abu Dhabi city.
Amid the current liquidity squeeze, the company has the financial resources needed to bid on rewarding projects making it well positioned to benefit from the real estate market slump.
Saudi Arabian Amiantit
Amiantit manufactures many kinds of pipe and has a good future considering that Saudi boosted budget expenditures on water infrastructure by almost a third from 2009 budget. This issue will benefit companies, including Amiantit that deal with infrastructure.
Amiantit has diversified its geographical presence in a way to be close from their client and reduce the high transportation costs that will incurred to move if they where in another region.
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