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14 April 2024

Invest in GCC's bank, telecom and cement stocks: ENBD

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Bank, telecom and cement stocks are the best to invest among the GCC equities, said Arjuna Mahendran, Chief Investment Officer at Emirates NBD Wealth Management.

Banks, he said, are the primary beneficiaries of the GCC recovery. The business cycle supports credit expansion, lower bad-debt provisions, thus ultimately earnings growth.

“The bright outlook for cement companies is driven by surging infrastructure expenditure and construction building – especially in Saudi Arabia – as well as by a sector dividend yield which is substantially above market average. Last but not least one should look into telecom stocks, which are relatively insulated from the business cycle and boast high dividends, and convey thus a non-cyclical tweak to the whole portfolio,” Mahendran said in a note released on Wednesday.

“Within GCC equities, we highlight once more the importance of selective investing, as only some pockets of value seem to be left in the market. Consideration should be given first to sector selection and thereafter to stock picking. In this respect, we find that good risk-reward sits with cement companies – for high dividends and the appealing growth outlook – with banks – an early cyclical sector which is likely to grow more than the market – and telecoms for the dividend yield,” he added.

He said the absence of excessive external borrowings by governments in the GCC area coupled with a strong balance of payments position is attracting emerging market investors who have lost money in other emerging markets.

GCC not be affected by Ukrainian crisis

Mahendran said markets in general were quite unruffled in spite of mounting tensions between Ukraine and Russia and it is unlikely that the GCC will be unduly affected by developments in Crimea.

Against this backdrop GCC credits remain well-bid along with high-grade bonds in developed markets. In the emerging markets space there was no rout either: Indonesian sovereigns actually tightened, while Russia, Turkey and Brazil were marginally unchanged over the week. Only CEEMEA default risk picked up significantly.

Within each sector, Mahendran highlighted the following stocks for specific reasons:

Samba sticks out as an inexpensive bank with solid capital base, good asset quality and a good earnings outlook, while Al Rahji has the highest profitability in the sector. Muscat Bank is the cheapest in the sector, considering its profitability.

Among cement stocks Mahendran likes Yamamah and Yanbu cement, as they are cheaper than peers with high return on equities.

Even though Mahendran picked telecom stocks more for dividends than for capital gains, he sees more upside in Zain Kuwait – a long-term underperformer – than in the other ones selected.

In the fixed income space, he highlighted that regional supply was limited to ISDB and ADCB totaling $2.25bn of issuance. Islamic Development Bank priced a 5-year Sukuk at 1.8125% (AAA rated) whereas Abu Dhabi Commercial Bank managed to swiftly price a 5-year bond at 3%. The Emaar Sukuk has had a solid run for February tightening 75 bps followed by Dewa 2020 maturity (-50 Bps). The Kuwait Project – our top conviction trade idea – is currently trading at 104.25, outstanding performance so far.

“We see significant demand on the Bahraini debt complex followed by Qatari paper both sovereign and corporates. Amongst the circa $18bn of maturities this year in the GCC space, UAE accounts for circa $11bn, followed by Qatar $5bn, caveat for the significant regional spread tightness when compared to counterparts in the emerging markets space.”

As for commodities, he said the trade suggestion of shorting gold at $1,340 levels with a stop loss at $1,360 may come under review shortly, taking into account what is happening in Ukraine.

“We think oil may be positively affected as well short-term,” Mahendran concluded.