GCC stock markets significantly underperformed the emerging markets during 2009. As against a 74% increase in emerging markets during 2009, GCC market returned a pale 18%.
Surprisingly oil prices remained strong throughout 2009 with a YTD increase of 85%. A recent report released by Kuwait Financial Centre “Markaz” points out that the financial crisis of 2009 laid bare the fragilities of the GCC stock markets. While market specific bad news was mainly responsible for the lackluster performance, lack of progress in regulatory structure (a key determining factor for attracting credible foreign money), and steep fall in liquidity (value traded) added to the woes. Earnings destruction was significant to recoup within a short span of time. Asset quality impairment for banks revealed the overall economic weakness and corporate governance failures came to the fore.
The report notes that in the past a strong oil price was enough to lift the market to speculative heights. Money was easy to make in that environment with north being the only direction where the price of any stock could move. Transparency and research was never demanded (due to lack of institutional investors) and even when demanded, they were not heeded to.
However, in the “new normal” world, oil price is not the only variable affecting the fortunes, hence, the relevance of the report’s 7-force framework.
When looked at the markets with this prism, a bullish outlook is given for Saudi Arabia and Qatar while being neutral on all other GCC countries.
Saudi Arabia – Positive
The report maintains a positive outlook on Saudi Arabia driven by strong positive economic expectations, healthy corporate earnings, positive investor sentiment and a stable geopolitical structure. Pockets of neutrality exist in terms of valuations (PE), market liquidity and regulatory structure.
Economically, the Kingdom is expected to resume growing at 4% in 2010 (in line with the historical average), while inflation is expected to remain under control. Healthy crude oil prices are expected to have a positive effect on the fiscal and current balances. As for corporate earnings growth, these are expected at 14% for 2010 versus an estimated 26% in 2009. In terms of sectors, corporate earnings support is expected to come from Banks and Financial Services. Additionaly, investor sentiment (as measured by Bayt.com) was up 12% YoY as of August 2009 while the geopolitical outlook (as measured by EIU) remains stable.
Market liquidity remains a concern for all GCC markets; in the Kingdom, value traded was down 35% in 2009. However, the market is fairly open to foreign investors and the regulatory structure is relatively sound.
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