The stock markets of Saudi Arabia, Qatar and Oman had a mixed year in 2012. Saudi Arabia’s Tadawul Index pared much of the exceptional gains in the first quarter of the year, to be up only 7% until the close of last week. Qatar, after a strong 2011, remained in the red for most of 2012, with a year-to-date loss of 5.36%. Oman, for the year, also was down 0.34%.

Going into the New Year, fund managers, however, see all the three markets offering value, eyeing specific sectors and stocks.

The upbeat mood of the managers has much to do with positive policy stance across the board. The Gulf governments continuing to accumulate surpluses given the high energy prices, which are above their break even point, and follow their expansionary plans in the physical and human infrastructure are likely to boost company earnings that are expected to positively impact investor sentiment.

As Bassel Khatoun and Salah Chamma, Co-Portfolio Managers Franklin MENA Fund point out in an email note to Gulf News, barring the petrochemical sector, Saudi corporate earnings have continued to grow, with the banking and retail sectors leading the way.

“The International Monetary Fund maintains a 6% real GDP growth forecast for Saudi Arabia and we are confident that that the Saudi authorities have the budgetary resources to continue to support growth through social and infrastructure spending.” Also, developments on the legislative and economic front in Saudi Arabia, including the authorities’ approval of the kingdom’s first mortgage loan law are a positive.

Rami Sidani, head of Mena equities at Schroders expects the expansion in the Saudi budget, with the surplus petrodollars being channeled across the economy, fuelling growth and translating into rise in corporate earnings.

Importantly, he points out that “Saudi is trading at a discount relative to its historical averages. We are constructive on all sectors across the economy.” According to Bloomberg the Saudi market is currently trading at P/E of 14x (for 2012 estimated P/E is 12.7x) and looking at the past five years the average market P/E multiple has been 17x.

But Sidani is particularly positive about banks, which will be an obvious winner of government spending as this creates lending opportunities for them. “They are very liquid and ready to grow their loan book and keep up with the underlying GDP growth.”

The companies operating in the infrastructure like contracting companies, building materials will be also clear winners, he says. To this list, he added companies with the domestic consumption theme, which were clear winners this year, outperforming the rest of the market.

On petrochemical sector stocks, Sidani said they were “quite selective as we focus on companies with volume growth than depending on pricing growth. “The general petrochemical sector will continue to do well but we feel that other sectors that are more domestically driven, more insulated from the slowdown in the global economy are better placed.”

On the Qatar market, Sidani is “very bullish. The Qatari stock market lagged in 2012, mostly paying the price on its strong performance in 2011. With a 10% overall gain in 2011, Qatar was in fact one of the best performing markets in the world, when most were in the red. This year’s negative performance had also to do with the slowdown in the project award, according to Sidani.

“This is again an economy driven by government spending and general infrastructure and more importantly all the preparation for the big event of World Cup in 2022 is likely to begin in 2013,” said Sidani.

“We believe that project tenderings and the awards will kick in in 2013, which will create opportunities in the banking sector and we expect to start seeing strong liquidity being injected in the economy, benefiting different sectors,” he said.

And, accordingly, in Qatar, Sidani says, the best plays to leverage on the domestic growth would be through commercial banks.

Khatoun and Chamma add: “While investors showed a lack of enthusiasm for the Qatari market [in 2012], economic releases and forecasts remained buoyant. Delays in a number of expected tenders have been counterbalanced by news of a tripling of sales of liquid natural gas to China.”

“The state’s budget plans for the current financial year projects a 28% increase in public spending, which should ensure that Qatar remains one of the fastest-growing countries in the world,” they added in their note. “Qatar’s massive hydrocarbon resources, large currency reserves, and strong government balance sheet make it one of the more defensive markets in the region, and one that we expect could outperform in a down market.”

“Overall, we expect pro-growth fiscal measures through record government budget announcements and accelerating bank lending to set a positive tone for 2013,” Khatoun and Chamma wrote.

They prefer non-cyclical domestic growth stories over cyclical, export driven investments given the substantially weakened global growth environment.

“We favour consumer and retail plays wherein supportive demographics and improving spending trends underlie an exciting demand story,” Khatoun and Chamma added. “We are also keen to access companies that are directly or indirectly exposed to governments’ infrastructure spending and are specifically targeting contractors and materials suppliers to these projects. We are invested in banks that operate within a supportive macroeconomic backdrop, and are encouraged by accelerated lending in countries such as Saudi Arabia, Qatar and Oman.”

Stock picks:

Haissam Arabi, chief executive, Gulfmena Investments:

SABIC (Saudi Basic Industries Corporation): Thematically we are avoiding petrochemical names with specific products, however SABIC a well diversified chemical giant company is a good call option on the hope that next year CHINA and INDIA economies will be turning around. Manufacturing numbers from CHINA are already encouraging and showing recovery signs which could improve petrochemical prices as manufacturing demands increase. At a PE of 11x and a yield of 5.5X it remains a must have stock in any portfolio.

MAADEN (Saudi Arabian Mining Company): With diammonium phosphate and fertilizer productions coming along and recent announcement that Aluminum production has started this company trades at a PB of 1.7x well below the market average and next year helped by the new deal announced by TATA to start Land Rover production in Saudi will ensure demand is there for Maaden production and SABIC plastics.

Industries Qatar (IQ): A mini SABIC and good call on global economic recovery plus additional capacity coming through, IQ is probably the best company today in Qatar in terms of future prospect and valuations (PE10x) and its dividend yield of 5.5% positions it well with Qatari investors.

Shaker: best value and dividend yield play within the consumer company sector and we pick Shaker for its 5.82% yield while it still trades at a PE of 12x well below its peers averaging 16x.

Saudi Cement: this is a double whammy play, betting on sector sales growth despite cement price caps, YTD growth of 15% in sales while PE has now troughed to 13.5% and dividend yield a whopping 8.7% for Saudi its only a matter of time before investors send its share price climbing.

Bank Al Rajhi: largest and best positioned retail bank in Saudi. While we continue to underweight banks in the region we favor this one from the lot especially as it will be the prime beneficiary from the recent mortgage law which will start bearing fruit next year.

Tariq Qaqish, Head of asset management at Al Mal Capital:

Sadafco (Saudi Dairy and Foodstuff Co.): It is a leader in long-life milk, ice cream and tomato paste in the Kingdom. While the company’s inputs costs have risen alongside of grain prices (skim milk powder, 50% of COGS), their flexible cost management versus other dairy companies gives them an advantage. Skim milk powder has a rather long storage life of 18 months and can be thus be more opportunistic in purchasing compared to Almarai for example. They additionally have a solid balance sheet with ability to expand in new ventures. In terms of valuation, they are trading at a 2013 P/E of 11.8x, which is a c25% discount to that of Almarai.

Dar Al Arkan: The company’s business model is still primarily a land sales model with a very low asset turnover subduing the company’s efficiency ratios. Nevertheless, analysts discount rate assumptions, while deservedly high, are likely to begin trending down making Dar Al Arkan look attractive. There’s scope for cost of equity of analysts to drop to about 13% as company improves its liquidity management.

Their 2015 bond around is yielding c6% while analysts are using above 10% as a discount rate for debt. Additionally, the company’s average cost outstanding debt is 5%-6%. Lastly, Dar Al Arkan has a price to book of 0.59, which a 20% discount to Emaar Properties. We believe the Saudi real estate market, with the mortgage laws being passed as well as the ongoing spending, is likely to be a catalyst for the stock going forward.

Saleem Khokhar, head of equities at National Bank of Abu Dhabi:

Al Hokair, Savola and Almarai: In Saudi Arabia, consumer and retail sector should continue to perform. Al Hokair, Zara and other brands have excellent exposure to female consumers, especially ladies clothes. Savola has the Hyper panda chain in Saudi and owns a sizable chunk of Al Marai. Also has other real estate investment in Saudi (KEC) and produces cooking oil (Afia) and is a very large sugar refiner in Saudi.

Al Marai fresh milk, dairy produce, juices, poultry and bakery goods. Great brand and great distribution network. Again Saudi Consumer exposure.

Qatar National Bank: The “national champion” will benefit from strong fundamentals and government spend in Qatar. QNB will benefit from strong loan growth in Qatar and government push to develop Qatar into a favoured regional destination.