Dubai: UAE and Gulf stock market investors will have some fine balancing to do over the next few weeks as they try to avoid renewed concerns over whether the global economy is hurtling towards a recession in 2023.
US markets have been in turmoil since mid last week, after the Federal Reserve announced a 0.5 per cent rate hike and said more needs to be done to cool inflation. Today (December 19), most of the Asian markets have opened weaker and Gulf markets can expect some of that downbeat sentiments to seep through.
So, how much of a negative is it likely to be? The Saudi Tadawul is already down by more than 9 per cent despite a string of IPOs, capped by the listing of the F&B operator Americana (which also had a dual listing on ADX as well).
The surprise statement from the US Fed chairman last week has sent global market into chaos. Fund managers are expected to play safe bets transitioning away from equities towards bonds. Gulf markets are expected to see flattish performance till the end of the year due to lack of catalysts
What market cues should UAE and Gulf investors be taking in on their next moves? Should they wait until the stream of 2022 financial results start coming through from late January and early February? And for the present, park their funds in ‘defensive’ sectors such as utilities, healthcare and banking (banks are widely expected to deliver on strong full-year 2022 results)?
Investors can also opt for higher exposures in energy industry facing stocks, despite oil prices remaining under pressure at sub-$80 a barrel.
In the UAE, stocks such as IHC (International Holding Co.) and Multiply Group are garnering heightened investor buy-in for being potentially ‘recession-proof’. “Holding company stocks such as IHC are going to be much sought after, because they are not exposed to any one sector or geography,” said an analyst.
While equity markets in the region have performed better than those in the US and Europe, we can't discount the fact that Gulf equity markets are not immune to larger global market contractions, rising interest rates, inflationary pressures, oil price volatility and fears of recession. In fact, if we look at regional market performance YTD, the Saudi market is down 9.2%. So, there definitely seems to be some cause for pause among investors
As for privately-owned enterprises in the Gulf seeking a switch to publicly-owned, timing and pricing will be of essence. "This is where Americana ticked all the boxes - others will need to do the same but in potentially a tougher market environment," said an analyst.
According to Junaid Ansari of Kamco Invest, "The IPO pipeline in the GCC remains active going into 2023 with a number of announcements recently. However, we expect to see overall activity to recede from the record levels seen in 2022 as equity markets are expected to remain under pressure globally due to fears of recession next year."
Re-allocate those funds
“We believe the year-end will be more to do with rebalancing and adjusting towards long-term target asset allocations,” said Junaid Ansari, Head of Investment Strategy & Research at Kuwait-headquartered Kamco Invest. “We can expect to see higher allocation to bonds as yields remain lucrative after the recent rate hikes (in the US and matched by central banks in the Gulf).”
Oil price proves a downer
Before the latest drop, US and global markets have had their share of downside turmoil through this year. But during those phases, Gulf investors still had the cushion of oil at around $90 a barrel and with a strong pull towards the $100.
It’s that cushion that’s been missing in the latest downturn. “With oil prices expected to remain fragile due to several offsetting factors, we see limited positive catalyst for GCC markets in the region, including UAE and Saudi Arabia, by the year-end,” said Ansari.
Investors in the UAE have already turned cautious as recent activity in the capital markets show in terms of price action
Abu Dhabi is ‘best performer’
“As a result, we expect to see Abu Dhabi as the best performing market in the GCC for the second consecutive year - and one of the best in the world,” he added. “While Saudi Arabia is expected to underperform in the GCC, it will see a smaller decline than most other global markets.”
FY-2022 results can set the mood
This is why the second-half of January will be critical in deciding how Gulf stock markets will likely perform short-term. If the region’s blue-chips deliver blockbuster numbers on 2022 results, the investor mood can definitely get a lift.
The Fed and ECB seem determined to leave a lump of coal in everyone's stockings this holiday season
Also mattering much will be how these companies talk up their chances for 2023. “Based on our analysis of Q3-2022 earnings calls from GCC companies, it was the first quarter in over a year that we saw a marked decline in management sentiment,” said Oliver Schutzmann, CEO at Dubai-based Iridium Advisors.
“The Iridium GCC Earnings Call Sentiment Index dropped 8 per cent quarter-on-quarter. At the same time, 'confidence' — a measure of how strong or weak the language used during earnings calls is — increased.
“As confidence is often a leading indicator of sentiment, investors will be keeping a close eye on whether management sentiment will rise again in upcoming reporting cycles or continue its downward trajectory.”
Retain foreign investor interest
If all that recession talk does turn out to be true, the Gulf markets could end up drawing a lot of foreign investor attention, as they chase Emerging Market opportunities. “We don’t see foreign investor interest in GCC stocks waning because, on balance, equity markets in the region outperform those in the US and Europe,” said Schutzmann.
“Particularly emerging market investors will continue to invest in certain GCC stocks in an effort to limit exposure to recession fears and diversify away from the Russian market which remains off-limits.” And that represents opportunities for UAE and Gulf stocks - and for planned IPOs too.
