GCC corporate earnings to remain stable in 2017, report says

Performance of regional equity markets has been disappointing in the context of the global rally

Saudi Arabia's Nomu market accounted for nine IPOs in the first hal of this syear worth $200.5m . Reuters

Corporate earnings of GCC-listed firms look stable this year, but political uncertainties and weaker economic growth in the backdrop of low oil prices have made it difficult to be bullish about the markets, according to a market report.

The price of crude, going forward, will be key for the region and its equity markets as it has implications on fiscal policy and the ability of governments to support their economies through what is expected to be a challenging period of transition and reform over the next few years, Tarek Fadlallah, the chief executive at Nomura Asset Management Middle East said in the research note released on Monday.

Governments in the GCC, which is home to about a third of the world's proven oil reserves, rely heavily on the sale of hydrocarbons for revenues. A slump in oil price from the mid-2014 peak of US$115 a barrel to the current level below $50 a barrel has lowered the overall economic growth and dented corporate earnings in the past two years, especially for the financial institutions, and firms operating in oil and gas and petrochemical sectors. The equity markets have also largely followed the oil price movements during the period.

"This is the third consecutive year that oil prices are averaging below $50 [a barrel] – comparable to the levels seen in 2004 when the regional economy was around half its current size," Mr Fadlallah said.

"The market is awash with contradictory data and the outlook is murky, to say the least, but it seems unlikely that oil will fall below $40 [a barrel] anytime soon and equally improbable that it will rally above $60."

Weaker oil prices have also forced the Arabian Gulf monarchies to transform their economies and cut dependence on hydrocarbons.

Many have reduced subsidies and slashed public spending, but that has done little to lift investor sentiment, which remains cautious.

"The benefits of regional reforms will surely emerge, but not this year, and probably not before the latter half of next year, and only after further pain that leads to massive consolidation in key domestic sectors," Mr Fadlallah said.

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In terms of corporate earnings, Marmore Mena Intelligence estimates that aggregate GCC profits will increase by 8.1 per cent, helped largely by a sharp recovery of Abu Dhabi National Energy company (Taqa) after last year's unexpected $4.7 billion loss.

"Excluding the 'Taqa effect' the overall profit level across the region is broadly unchanged," Mr Fadlallah said, adding that the absolute level of profits, at just over $63bn in 2017, is similar to that achieved in 2013 and 2015, but below the all-time high of nearly $69bn recorded in 2014.

By country, corporate earnings in Saudi Arabia will rise 1.9 per cent and in Kuwait by 8.2 per cent. Profits in Qatar are likely to decline by 6.5 per cent, about 5.8 per cent in Bahrain and 8.8 per cent in Oman.

The UAE is expected to be  the best performer, with a 39.4 per cent jump in earnings, due to Taqa. Banks in the region will dominate the earnings landscape, accounting for nearly 46 per cent of total profits.

"While investors' focus is on the large listed companies, much of the angst being expressed by deteriorating business sentiment is at unlisted private companies that form the backbone of the economy," he said.

Qatar's problems with the quartet of Saudi Arabia, the UAE, Bahrain and Egypt, he said, has also added to economic weakness and uncertainties that have hurt business confidence and tarnished the GCC brand – just when the need for international investment is greater than ever, Mr Fadlallah added.

The performance of regional benchmark indexes in particular has been "disappointing" in the context of the global rally, which is a reflection of the adverse macro and micro-economic developments, he said.

Although the valuations of the markets here are not "particularly cheap" against international peers or their own historic averages, they are still trading at a discount to their global peers.

The benchmark S&P 500 Index has risen 8 per cent year-to-date while MSCI Asia excluding Japan Index has added 26 per cent since the beginning of this year.

The main stock gauge of Saudi Arabia, the biggest equity market in the GCC, in comparison is flat and Dubai DFM General Index has added 2 per cent this year. The only significant gainer in the region is Kuwait which rose 20 per cent for the period. Qatar's main measure has dropped 12 per cent while Oman's is down 15 per cent.