Dubai: Post a busy week with focus on central banks and sovereign credit actions, we expect regional market participants to shift attention to German politics, Kurdistan referendum, and FTSE emerging market developments this week. Last week, the FOMC (Federal Open Market Committee) meeting was hawkish, translating into 10-year treasury rates increasing by 5 bps over the week, while probability of another rate hike this year increased to 63 per cent compared to 53 per cent before the meeting. Interestingly, FOMC maintained its inflation narrative, expecting inflation to revert to its target by 2018/19. On the sovereign credit side, S&P downgraded China to A+/Stable (from AA-/Negative previously), the first decline since 1999, citing concerns from soaring debt growth, while Moody’s downgraded UK credit rating by a notch to A2 on stretched public finances, further pressurised by Brexit challenges.
Looking ahead, the major regional market event would be announcement on any potential inclusion of Kuwait and/or Saudi Arabia in FTSE EM Index. The market consensus is that Kuwait and KSA will be included in FTSE EM over the next year, however, timing is tricky. Our house view is that Kuwait will be included in September review, results expected post US market close on September 29, while KSA inclusion would be slightly delayed due to very recent implementation of reforms in settlement cycle. We selectively play Kuwait and KSA ahead of FTSE announcement, while continue to be on the sidelines on Qatar on expected continuation of liquidity crunch and weak fundamentals. Within UAE, we like exposure to heavyweight real estate names and selective banks among the major sectors.
Improvement in asset quality
Kuwait stock market has rallied 18 per cent year-to-date, partly supported by market expectations on potential FTSE inclusion (expected weight: 0.5 per cent), and well-supported by strength in the banking sector. We remain bullish on lending growth prospects for the banking sector (2017 estimated: +10 per cent) in Kuwait but now prefer adding exposure to smaller bank, Kuwait International Bank (KIB). We expect recent improvement in asset quality and equity returns for KIB to sustain, while see the valuation as cheap (2017 price to book: 0.85x, return on equity, ROE: 8 per cent). Within Saudi market, we prefer increasing exposure to heavyweight, Al Rajhi Bank, within the banking sector, while adding exposure to petrochemical sector on supportive oil price and recent strength in product spreads. We expect Al Rajhi to record high single-digit growth in lending in 2017 while see higher dividends to continue for this year and support the share price. We continue to like exposure to Sabic and Yansab within major petrochemicals on recent strength in product spreads, while adding exposure to National Petrochemicals Company (Petrochem), which has underperformed the market by 17 per cent year-to-date. We expect Petrochem’s second half underlying performance to be better than the first half on sustainable product spreads in the short-term while earnings growth is expected to be driven by higher production as H1 was impacted by unplanned shutdowns. The Qatar market has declined 16 per cent since the regional spat came into picture, with non-Qatari investors since then pulling out over $500 million from the market. We continue to see limited value in the market, even post massive underperformance, on liquidity crunch and unfavourable fundamentals for heavyweight banking and industrial sectors.
Attractive dividends
Within Dubai real-estate market, we continue to like exposure to Emaar over Damac, with Emaar’s planned development business IPO (general assembly on October 15 to approve offering up to 30 per cent) to continue to support the stock re-rating, in our view. We remain very selective within Dubai banks, with focus on increasing exposure to Dubai Islamic Bank, which trades at cheap valuation (estimate for 2017, price to book value, PBV at 1.65x and return on equity, ROE: 21 per cent) while offering attractive dividends (yield: over 7 per cent). Among other index names, Dubai Entertainments announced that it has reached an agreement with the major shareholder, Meraas, for subordinated shareholder loan of Dh245 million (no maturity) to fund operational expenses and debt repayments. We note that the company has already drawn the entire Dh4.2 bn term loans to fund the phase 1 of the project and has Dh130 million debt repayment obligation in the short-term. We continue to seek better colour on the visit guidance for 2018 (and beyond), and expect share price to remain weak in the short-run. In the Abu Dhabi market, we seek to increase exposure to the real estate sector through Aldar Properties. Although we expect recent weakness in yields in the recurring portfolio to persist, we see that it is more-than-reflected in the stock price. We expect potential positive surprise on dividends in 2017 (market consensus: Dh0.12) to support the share price in the medium-term, further underscored by high exposure to recurring income (2017 net operating income, NOI guidance: Dh1.6 billion).
— The author is a vice-president at Shuaa Capital and is a part of the SHUAA Investment Management team, he can be reached at im@shuaa.com.
