Can Gulf stocks keep going their own way?

London: As we venture convincingly into the new year, it’s apparent that regional stock markets have managed to maintain a measure of differentiation from their global counterparts.

While investors internationally are showing signs of fretting over the race between economic indicators and equity performance — and whether the former will catch the latter’s lead to spark another surge — Gulf indices, retail-inspired, suggest a certain immunity from these swirling doubts, Dubai’s most of all.

Does that decoupling hold water, and, if so, will it remain watertight if there is spillage or some kind of deluge among overseas benchmarks?

Last week’s investment report from Al Masah Capital put the issue in fairly stark terms, unequivocally sceptical of the durability of the divergence phenomenon.

“Buyers kept the momentum going, using any weakness to increase their holdings,” it advised, but “it seems improbable that [regional markets] can maintain this type of action; at some point a wave of selling, profit-taking and consolidation will take place”, an event that would expose whether the bourses harboured “true, inherent strength”.

That description suggests a herd mentality in operation, at least. Still, the Gulf’s markets might yet maintain their buoyancy, bearing in mind that equities worldwide, though they have a particularly uncertain feel about them right now, could still avoid the fracturing that could bring contagion to bear across markets.

Indeed, global themes for 2014 are essentially positive, as represented in the reports and outlooks of international banking brokers and fund managers.

Among the top ten trades for the year nominated by Barclays, for instance, was the advice to go long in emerging market stocks, against the backdrop of continuing acceleration of global economic growth, even with ‘normalisation’ of US Federal Reserve policy looming.

Societe Generale’s latest investment strategy document foresaw four key drivers being sustained this year: accommodative monetary policies still, fiscal policies becoming “less of a drag”, economic growth improving steadily, and the evolving dynamic of the credit cycle, whereby the bellwether that is the US corporate sector engages in releveraging and recovery. In that regard, the Fed’s efforts to ‘taper’ stimulus is read as “healthy rebalancing” rather than too much a threat. In all, while some potential for disappointment may still be attached to emerging markets — which have clearly been shaky — more so than the developed economies, the picture “translates into an overweight position in risky assets”, i.e. equities.

Meanwhile, turning from the economics to corporate trends, Franklin Templeton Investments (FTI) expects the earnings growth seen last year to persist in 2013, boosted not only by increased consumer spending but also the US’s technological impetus. The group nevertheless acknowledges the scope for volatility associated with tapering expectations, which is bound to keep investor enthusiasm “in check”.

On the regional perspective specifically, FTI has indicated it believes Mena equities can establish a certain separation for themselves “as a single, identifiable subset within the general emerging market universe”. Moreover, in the low interest-rate environment which seems set for some while yet, a combination of extra yield, firm financial fundamentals and the dollar peg (keeping GCC exchange rates protected from currency fluctuations) is likely to prove attractive to institutional funds flows, aside of the obviously bullish economic growth data.

FTI cited “investor inflows to the region of around US$4 billion in 2013, while the same period saw net outflows of some US$19 billion in the emerging markets”. Better liquidity manifested itself in substantially higher market turnover, and would have been complemented by MSCI’s decision to upgrade Dubai and Qatar’s market status, as well as the winning Expo bid and World Cup prospects boosting their respective profiles.

In addition to this collective platform for out-performance, “analysis further shows that Mena equities have low correlations to global indices”, FTI observes, at just 0.21 during the past three years, compared with the 0.70 ratio of emerging markets overall versus the developed arena. Portfolio diversification becomes an appealing possibility with those figures in mind.

These are longer-term factors, though. In the shorter term, Emirates NBD’s wealth management office anticipates a mild dip in local indices in the first quarter, as the current rally becomes exhausted.

“Hence we would adopt a defensive tone in our portfolios [to be found in utilities and telcos], and look to take partial profits on overheated sectors like real estate and financials,” the CIO’s latest weekly newsletter said. Into the second quarter, however, another spurt might be seen.

Right now banks and brokers are looking to the reporting season for essential guidance. “Saudi corporate earnings are mixed so far, not providing enough of a trigger for that market to follow its peers,” says Al Masah Capital. “UAE and Qatar earnings will be watched carefully.”

In that sense, local investors may eventually be as attuned to the need for evidence as is true at the global level: will corporate testimonies validate the optimism that has so far prevailed?