Significant upside to select Gulf stocks: Sico

Gulf stocks present significant potential for gains with limited downside risk, Bahrain-based Securities and Investment Company (Sico), said in its latest research document. "Considering the weak improvement in the global and regional macro picture, the panic selling in GCC markets in 2008 and partial recovery thereafter, and a seemingly increased risk appetite, we believe that investors should look more favourably at increasing their measured exposure to GCC equity markets," said Sico analyst Jithesh Gopi in the document emailed to Emirates Business . "After a 20 per cent hike in the MSCI GCC index, we feel that one should be very selective in picking significant upside stocks." The investment bank has highlighted several factors that present a positive outlook for Gulf stock markets, as well as some factors that may prove to be party-poopers. The upside Global cues: World equity markets saw a reversal in fortunes during Q209, after a turbulent first quarter and an unprecedented dismal 2008. World equity market capitalisation increased by 13 per cent year-to-date, or $4 trillion (Dh14.69trn), but gained 41 per cent from its low of $25.5trn on March 9. "However, the market is still substantially below its all-time high of $62.5trn (October 2007). The revival in equity markets was sharper in emerging countries, which had also witnessed a steeper fall when global markets were contracting. "The GCC equity markets followed the trend, though at a slower pace and with a lag, fuelled by oil price recovery, and underpinned by a seeming improvement in the global macroeconomic outlook," said Gopi. Post Q109, Sico said, a mild revival has been observed in the global macroeconomic picture, which has led to an improvement in global business confidence. This has led to significant overall reductions in bank borrowing costs, improvement in liquidity and an increase in investor risk appetite, which has increased interest in equity markets. "However, recessionary fears and their potential effects are far from over, even though the unprecedented stimulus packages and concerted efforts seem to have succeeded in averting further weakness in the global economy," warned Gopi. Corporate performance: Sico believes Gulf investors are now better equipped to make investment decisions having glimpsed the quarterly results while factoring in the likely bottoming out of property and commodity prices and an improvement in broader markets. "We believe that Q109 results provide a fair representation for the remaining part of the year for the GCC region. Our sample of listed GCC companies reported profits of $8.1 billion in Q109, compared to a loss of $4.6bn in Q408, indicating a significant improvement in performance on a quarterly basis," said Gopi. "However, profits are still significantly lower compared to the first three quarters of 2008, which saw an average quarterly profit of $15.1bn." Crude effect: A steady increase in oil prices have improved sentiment in the region that exports the largest chunk of crude globally, but Sico believes the stock markets have yet to price in this factor. Reflecting the improvement in the global economic outlook, oil prices have more than doubled after touching a low of $33 per barrel in December 2008. This has alleviated concerns about budget deficits, liquidity, government support, and major slowdowns in development activities by regional governments. Sico research shows that each dollar increment in average oil price results in more than $5bn in additional annual revenues for the Gulf countries. "We have become more positive for future prospects of the Gulf markets, as we believe that the regional equity markets have yet to price in the additional liquidity emanating into the region driven by the higher oil prices. Stability in oil prices during a period of uncertainty and economic slowdown bodes well for long-term prospects for the region," said Gopi. "We see any fall in the market due to weaker Q209 results or the summer lull as a good entry point for investors as we expect more affirmative triggers from global markets during H209." The downside Summer doldrums: The summer season has always affected GCC market activity over the past few years. In four out of the past five years, average quarterly volumes and values have dropped in the summer months. Average monthly traded value in this period has been lower compared to the preceding quarter. During the past two years, average monthly traded values have also been lower than the average monthly value for the year, showed Sico research. "We do not foresee a major sell-off and exit from markets during this summer, as the YTD traded value is significantly lower than the preceding four years. However, a short-term correction and a moderate decline cannot be ruled out," said Gopi. "We believe that the seasonal impact on the markets is driven more by sentiment than by any fundamental factors. "If we continue to see more signals that are positive globally