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Low interest rates and expansion will spur growth

By Paul Cooper

A weak oil price, sharply higher CDS spreads and a significant bout of profit-taking throughout the emerging world is not a backdrop you'd normally associate with robust equity markets in the Gulf. While the overall gain of just 0.3 per cent (MSCI GCC Index) was obviously modest in absolute terms, it compared extremely favourably to some of the largest emerging markets, such as Russia and India, which fell by 12 per cent and 10 per cent respectively, and to the MSCI global emerging market index, which fell by 9 per cent (all figures refer to the four week period ending Friday, February 12, source: Bloomberg).

Of course, not all countries in the GCC were strong and the UAE continued to suffer from the Dubai World fall-out. Bahrain was also subject to speculation regarding the proposed refinancing of $300 million (Dh1.1 billion) of debt for Gulf Finance House, though it appears to have passed without serious incident. Elsewhere, there was positive news and Qatar, Oman and Kuwait achieved positive returns for the month. The significance of this, given the global backdrop, should not be underestimated.

On the back of high oil prices and improving economic prospects, governments throughout the GCC announced better-than-expected revenues for fiscal 2009 and ambitious spending plans for 2010. Saudi Arabia, who's 2010 budget included a 14 per cent increase in spending, started the process, followed by Oman with a 12 per cent uplift in budgeted expenditure. More recently, we saw an extraordinary 35 per cent increase in spending announced by Kuwait and the promise of a "much larger" budget from the Prime Minister of Qatar. Kuwait received additional support from an unexpected 50 basis point cut in interest rates and a statement that the Kuwait Investment Authority would invest $3.8bn in the local stock market. The Kuwaiti stock market was the best performer last month, rising by more than five per cent.

The comparison with the "developed world" is stark as it struggles to cope with double-digit budget deficits and record levels of debt. This is placing an unbearable strain on government finances, making further fiscal stimulus unlikely. As the economy is unable to withstand tighter monetary and fiscal policy at the same time, interest rates will have to remain low. This means that countries with currencies pegged to the US dollar, such as those in the GCC, will also enjoy low interest rates. The combination of low interest rates and an expansionary fiscal policy will ensure strong economic growth.

Another feature was the improvement in profitability seen in the Q4 2009 earnings season. While individual results were mixed, the aggregate numbers have been impressive. Total profit for the companies that have reported so far, excluding Kingdom Holdings (which distorts the figures by virtue of its multi-billion dollar write-off in Q4 2008), was $6.4bn compared to $2.8bn in Q4 2008 (source: Bloomberg). Although a small number of large companies were responsible for the majority of the improvement – such as Emaar (an improvement of nearly $700m) and Sabic (an improvement of $1.1bn) the overall tone of the reporting season and the reaction of investors has been encouraging. For example, although we continued to see lacklustre loan growth and high provisions in the banking sector, investors chose instead to focus on the sector's exposure to the excellent long-term growth story.

After a turbulent few years, which sees the MSCI GCC Index 60 per cent below its 2006 peak, it is pleasing to receive some positive news again. International investors have been net buyers recently and, if sustained, the prospects for the equity markets are excellent. Of course, investor confidence is fragile and the risk of a disappointment in relation to Dubai World cannot be ignored. However, a great deal of bad news is already in the market (Dubai is trading on just 6x earnings) and with a low risk of contagion outside the UAE, Dubai is unlikely to derail the process of economic diversification that makes the GCC such a unique long-term investment opportunity.

The author is Managing Director of Sarasin-Alpen & Partners, Dubai. The views expressed are his own


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