Dubai: In the context of the changing global economic outlook, most emerging markets are becoming less attractive compared to developed markets while the Gulf region’s asset classes are looking competitive, according to Arjuna Mahendran, chief investment officer of Emirates NBD Wealth Management.
“The GCC region remains extremely robust, despite the ever-present threat that oil prices could subside in 2014. This is because all GCC member countries continue to build large external surpluses and have sufficient foreign exchange and fiscal reserves to withstand a 10 to20 per cent correction in oil prices,” Mahendran said.
For the next six to eight months, developed market asset classes, particularly US equity, look more attractive compared to emerging market equities, according to Emirates NBD Private Banking.
Although the housing sector recovery is seen flattening as US is poised to exit quantitative easing this year, strong corporate earnings make US equities a strong investment case.
On the contrary, declining growth in key emerging markets in general, political uncertainty and worries over debt overhang in China makes these markets less attractive, according to analysts from Emirates NBD.
“Supported by strong oil revenues and non-oil sector growth, GCC economies are seen to be supporting robust corporate earnings growth. The GCC and wider Middle East and North Africa region is likely to remain relatively insulated from wider emerging market turmoil, which could be triggered by capital outflows on the back of continued Fed tapering this year,” said Khatija Haque, head of MENA Research at Emirates NBD.
Non-oil sector activity continues to drive growth in the region’s two largest economies, even as oil production eased in 2014. The Purchasing Managers’ Index data shows that domestic demand in the UAE and Saudi Arabia was robust in the first months of this year.
The tourism, hospitality and retail sectors are expected to remain key contributors to growth in the UAE as the authorities have set ambitious targets for these over the medium term. Recent data indicates that the retail sector in Dubai enjoyed substantial increases in both sales and footfall last year, and the emirates’ hotels continued to raise rack rates while maintaining high occupancy rates.
It is widely expected that the inclusion of the UAE and Qatar stock markets in the MSCI Emerging Markets Index this week will draw investments to the region, largely from managers of large passive institutional funds globally.
Emirates NBD analysts said strong corporate earnings in the first quarter support the current valuations with upside potential.
In the first quarter of this year the UAE companies reported a median growth of 24 per cent, while Saudi and Qatar reported 4 per cent and 10 per cent, respectively.
“A sustainable earnings growth of over 10 per cent will help valuations stay reasonable in the regional markets. While MSCI inclusion is very positive for both [the[ UAE and Qatar, the recent increase in foreign ownership limits [is] going to improve volumes and liquidity,” said Anita Gupta, equity strategist at Emirate NBD Wealth Management.
Above all, the recent strong recovery in the real estate sector in Dubai and the wider GCC countries has set off a virtuous cycle of stabilisation in bank loan provisioning and enhanced provision writebacks on bank balance sheets.
