Investor appetite for GCC equities surges

(SALEM KHAMIS)   

GCC markets remain an appealing place to invest despite valuations becoming extended by conventional measures, Bahrain-based Nomura Investment Banking said in a report on Sunday.

Buoyed by elevated oil prices and rising corporate earnings, stock markets in the GCC had one of their most exciting months in December, ending the year with an average return of over 13 per cent for the month, according to data collected by Dubai-based investment bank Rasmala. The spectacular returns in the region occurred even as global capital markets had a poor year with multi-billion dollar losses announced by giant investment firms and many global funds.

Saudi Arabia’s Tadawul market was the region’s top performer for the month by a large margin, logging close to 18 per cent. Omani equities continued their steady march ahead and held on to their status as the region’s best performing market with above 61 per cent return for the year.

The good news is the GCC stocks have delivered where it counts and regional investors have done well over the past 12 months with gains that compare favourably with any benchmark.

Even though earning payback periods have become too long, the GCC stocks appear to be reasonably priced, Nomura said in its report. The rally in stock markets, which was initially induced by improved fundamentals such as relatively attractive valuations, higher earnings and lower interest rates, has created a momentum and liquidity driven phenomenon, said the report.

“The most compelling reason to buy many emerging markets recently has been that new investors have had to pay a higher price – a perilous strategy that may be unraveling after a six-year bull market. From this vantage, the GCC markets are neither the most speculative nor the most overbought and are likely to continue attracting new foreign capital as long as fund inflows remain strong,” the report said.

Valuations across the region are likely to remain attractive on the back of corporate profit growth, according to Rasmala. “Ever increasing public and private investment and consumption is expected to continue to drive corporate profit growth, making current valuations across the region attractive despite the sharp price increases of the past several months,” Rasmala said in its report on the GCC stock markets for December.

Nomura too believes the stretched valuations are not a cause for anxiety. Operating earnings have increased over the past two years and valuation multiples for the GIC GCC index are still about half the levels seen at the market highs in late 2005 and early 2006, the report said.

The report suggests that foreign investor appetite for GCC equities has gone up and the recently arrived international investors, along with an increasing number of dedicated regional asset managers, have introduced a greater degree of sophistication into the markets. This in turn should lead to more efficient pricing and better commercial discipline at listed corporations, said Nomura.

The Saudi Tadawul index was the best performer in the GCC for the fourth quarter of 2007, gaining 43 per cent and adding more than $150 billion (Dh550bn) in market capitalisation. Tadawul was the world’s best performing stock market in the quarter, just ahead of four other Arabian markets.

The gains during this period were led by heavyweight Sabic which rose a huge 58 per cent – equivalent to $48bn – and the banking sector that added 46 per cent – around $49bn.

The bank believes that relative to the size of the regional economies, the stock market capitalisation remains very high, but in absolute terms they are still fairly small by international standards.

“There are few bargains left but valuations should be supported by a resilient macroeconomic environment, lower interest rates, moderate earnings growth and plentiful liquidity,” the Nomura report said.

On the UAE front, Rasmala believes the macroeconomic environment is well placed to support further gains in equity markets. The bank’s outlook for the region’s GDP growth remains strong. “The macroeconomic environment of the UAE is well placed to support further gains in the equity markets. GDP growth is expected to be strong through 2010 and with oil prices sustained at high levels, government spending will remain an important and supportive factor to growth forecasts,” Rasmala said in the report.

“The market has been experiencing heavy inflows and outflows of ‘hot money’ which has been causing high short-term volatility. This is expected to change for the better as long-term mutual fund investors have been courted by the authorities after the DFM and the ADSM roadshows in New York and London, and marketing activities of leading fund managers and investment bankers in the UAE,” the Rasmala report said.

According to analysts, Western institutions have emerged as important players in the UAE equity markets in 2007 as hedge fund managers and proprietary desk traders shifted their focus to oversold markets to diversify their exposure to the more mainstream developed and emerging markets.

Looking forward to 2008, Rasmala expects record petrodollar inflows will continue to provide Mena countries with ample funds to invest in the expansion of their economies. Real GDP growth across the GCC is expected to reach eight per cent on average, with Qatar expected to be the fastest growing economy in the region as the expansion of its gas sector drives real GDP growth higher by an expected 14 per cent.

Analysts at both the banks indicated inflationary trends could continue to be a source of concern this year.