A recent Bank of America Merrill Lynch research report titled, ‘MENA & Frontier Observer’, says that the (Persian) Gulf Cooperation Council equity markets are looking increasingly attractive after the broad-based selloff since the summer.
In this context, the (P)GCC markets currently represent a buying opportunity, particularly with appealing stock valuations and stronger earnings momentum.
“There are broad-based buying opportunities, but stock selection is becoming key. We retain our bias for markets with robust macro, attractive valuations, consistent earnings delivery and/or superior earnings growth. These factors make the UAE our most preferred MENA market and Kuwait as our preferred (P)GCC frontier market. The sharp correction across frontier markets since the summer has also yielded strong opportunities across many other markets, including Saudi Arabia, Arab News reported.
“In this context, we believe stock selection (rather than market selection) is becoming more crucial and advocate a focus on quality and mispriced opportunities,” said Hootan Yazhari, head of MENA & Frontier Markets Equity Research.
He said, “As our most preferred attractively valued (P)GCC market, the UAE offers long term potential and healthy earnings momentum. The UAE is the only market with net earnings upgrades year-to-date, and our top picks are Etisalat, Emaar and ADCB. While in Saudi Arabia, opportunities have risen as the market is no longer expensive but we believe it’s time to get selectively bullish. Within Saudi Arabia, the consumer space presents an attractive long-term opportunity, and we reiterate our buy ratings on Al-Hokair and Al-Othaim.”
Geopolitical Threats
On the other hand, the (P)GCC macro story is likely to have peaked if oil prices stay low for long.
Twin deficits are expected, as well as weaker real GDP growth and softer non-hydrocarbon sector growth on greater fiscal policy prudence.
A prolonged period of low oil prices and regional geopolitical threats remain the primary risks.
The realization of external risks and global risk aversion may cut market access to Dubai Inc, risking a credit event.
Egypt benefits cyclically from lower oil prices but still needs to mobilize external financing, given its geopolitical importance. Key remains to advance the structural reform agenda and mobilizing external finance.
“In our view, the UAE economy is likely to soft land this year, as suggested by only modest deceleration in high-frequency indicators,” said Jean-Michel Saliba, MENA economist.
“The near-term direct impact of lower oil prices on UAE is more muted than for (P)GCC peers,” said the economist.
Saliba said, “While in Saudi Arabia, we think wider deficits cushion growth, due to softer non-oil GDP growth, risks on the government capex pipeline, stable politics and unwavering oil policy. Qatar remains the most resilient (P)GCC economy, in our opinion.”
