05/02/2017 07:29 AST
Middle East markets have enjoyed an impressive rally since September 8, with the region gaining 17 per cent in the fourth quarter, stated a Swiss financial expert.
The key driver for this was the strong recovery in both risk appetite (post the US presidential election) and oil prices (particularly after the unexpected Opec deal), according to a report by Credit Suisse, a leading global financial services company, based in Zurich.
After a strong Q4 performance, near-term consolidation risks are likely. However, further upside is can be foreseen beyond a potential consolidation, as improving macro indicators are starting to feed through to earnings forecasts, it stated.
Credit Suisse said the headwinds remain from weak job growth, fiscal austerity and (for some countries) a stronger dollar. Also there is a potential for geopolitical risks to increase under the Trump administration, it added.
"We remain positive on the UAE and are buyers of Egypt on weakness; we take profit and downgrade Kuwait and Oman to neutral," remarked Fahd Iqbal, the head of Middle East Research at Credit Suisse.
"We upgrade Saudi Arabia to neutral as it is no longer in a technical downtrend; we remain underweight on Qatar and Bahrain, though the former will likely see momentum continue in the short term," stated Iqbal.
"For most investors, the latter would seem to be the obvious driver for Middle East equities, but as we have highlighted many times in the past, the region has historically not shown any greater correlation to oil prices than the rest of the world due to the lack of energy-related equity listings," he noted.
After experiencing a contractionary economic environment over the past two years, economic indicators across the Middle East are beginning to show signs of improvement, stated the Swiss financial expert in its report.
The oil exporting GCC economies are set to reap the benefits of higher oil prices and progress made on subsidy reform, while Egypt has successfully initiated the politically difficult steps towards preserving its foreign exchange reserves.
Indeed, during the period of high oil prices from 2010 to 2014, the Middle East had a lower correlation to oil than the global markets. However, this has changed since the oil price crash and its central role in the region’s process of fiscal reform, said Credit Suisse in its report.
With fuel prices having improved, oil is becoming less important a driver to Middle East equities (correlation is topping out). However, Credit Suisse warned that a sharp move in oil prices would once again affect regional equities, it stated.
"Last but not least, we also highlight expectations of dividend payments as strongly supportive for the regional markets," remarked Iqbal.
"The majority of Middle East companies make annual dividend payments in calendar Q1 and, as a result, investors tend to position themselves accordingly towards the end of the preceding Q4. Given the high level of government ownership across the major listed equities in the region, the payout ratio has historically been above the global and emerging market average," he noted.
According to him, the economic growth is set to improve to 2.2 per cent in 2017 from 1.4 per cent in 2016 for the broader Middle East region, while the GCC is expected to grow 2.3 per cent in 2017 from 1.7 per cent in 2016.
The M2 money supply growth has bottomed out for the oil exporting GCC countries, though it remains muted and contractionary for Qatar, he stated.
"This improvement comes hand in hand with a reduction in fiscal deficits and a further increase in debt issuance. Fiscal deficits reached unsustainable levels in 2016 but by 2018 we expect to see all major economies in the Middle East rein in their deficits," he added.
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