Dubai: Equity markets in the Gulf Cooperation Council (GCC) will continue to benefit from increased global investment inflows, and specifically from active global emerging market funds, Bank of America Merrill Lynch officials said in Dubai on Thursday.
Sound economic fundamentals combined with strong earnings growth in 2013 have put many markets in the region in a strong position.
“The UAE has emerged as the world’s second-best performing market with year-to-date [YTD] increase of 61 per cent and 2013 earnings growth estimates rising by around 100 basis points to 9.6 per cent. Meanwhile, Saudi Arabia was ranked as a top 10 market performer with YTD increase of 21 per cent, and similarly Qatar performing equally well with YTD increase of 22 per cent,” said Michael Harris, Managing Director and Head of EEMEA Equity Strategy.
The regional equity markets are getting support from key macro drivers but they affect the GCC countries differently. It is particularly favourable for Saudi equities as they stand to benefit from record highs of domestic oil production and stronger China data. While the UAE’s oil production remains positive, in Qatar, the recent slowdown of money growth remains a potential short-term risk whereas oil production is stable.
Strong fund flows into frontier markets have been a key driver of outperformance in 2013. So far this year net inflows to all frontier funds are about $3 billion. According to Bank of America Merrill Lynch estimates, the Middle East markets have attracted close a quarter of these inflows.
The market reforms happening in most Gulf markets are expected to boost the fund flows into these markets. “The MSCI [Morgan Stanley Capital International] upgrade for the UAE and Qatar to Emerging market status and the market reforms under way in Saudi Arabia will work in favour of more fund flows into these markets,” said Talal Ghandour, managing director and co-head of equities for Middle East and North Africa at Bank of America Merrill Lynch.
Ghandour said the recent strong run of frontier markets have not pushed valuations to extremes for most major GCC markets such as Saudi Arabia and Kuwait), however the prices are relatively stretched in the UAE. The UAE market trades on a 12-month forward P/E (price to earnings) of 13.4 times, which is a 27 premium to emerging market valuation.
“Although the UAE valuations appear stretched, we do see upward potential in some real estate, construction and financial stocks,” said Ghandour.
The proposed merger of Dubai and Abu Dhabi bourses could impact the stock valuations as long as there are efforts to boost liquidity in the market. “Creation of a larger market with more new listings could boost the prospect of the UAE market, but a mere merger of indices would be valuation neutral,” said Harris.
Along with Saudi Arabia, the UAE equity market could be a structural winner in the long term. Saudi being the GCC’s biggest economy, there is a lot to benefit when the capital market opens up in the kingdom, while the UAE’s status as a regional hub could attract more foreign funds to the market. Additionally, with most Gulf currencies pegged to the US dollar, the markets unlikely to face any outflows in the event of tapering by the Federal Reserve.
