GCC equities outlook hinges on policy response to oil slump

The fate of GCC share markets in the coming year hinges on two things: oil prices and the response by regional governments to a likely prolonged period of relative austerity.

Already there have been unprecedented policy changes in reaction to the drop of nearly 70 per cent in oil prices since the summer of 2014, and share prices have started to adjust to what is inevitably referred to as “the new reality”.

The region’s largest equity index, Saudi Arabia’s Tadawul All Share Index, lost about 38 per cent from its peak in autumn 2014 to end last year at just above 6,900. Despite the partial opening of the market to foreign investors in June, Saudi shares slumped in the final months of the year as the prospect of an oil price recovery faded, and as the government moved to introduce major structural reforms to help manage the slide into fiscal deficit.

The losses on the Arabian Gulf’s other exchanges varied, from the Dubai Financial Market’s 40 per cent drop from the autumn 2014 peak to losses of about 18 per cent for the Abu Dhabi, Bahrain and Oman indexes.

The UAE government has been the quickest to rein in spending, partly by liberalising its transport fuel market in August, which eliminated budget subsidies estimated by the International Monetary Fund to be about US$12.6 billion – 9 per cent of annual government spending – on a pre-tax basis.

Saudi Arabia followed suit with more modest cuts in fuel subsidies and selective increases in utilities bills as part of 20 billion riyals (Dh19.58bn) of cuts in government spending in an 840bn riyal budget.

The Omani, Bahraini and Kuwait governments have all said they will be cutting fuel subsidies as part of their budget reforms.

But the big questions that remain – not just for the broad economies, but for the effect on sectors within them – are whether the governments have the resolve to press on with these structural changes, and how far and fast they will reform.

The level of cuts and changes to public-sector project funding and employment conditions, and to entitlements more broadly, will filter through to sectors of the economy in good and bad ways, says Nishit Lakhotia, the head of research at Securities & Investment Company in Bahrain.

“There are a lot of different policy measures that need to be taken, and they will have a wide impact,” he says. “Nothing will be immune.

The early losers have been petrochemicals producers, such as Saudi Basic Industries, which have already been hit by low prices for their products and now must pay higher feedstock prices. The financial services sector also is vulnerable to slowing lending and growing defaults.

“But not everything is doom and gloom,” says Mr Lakhotia. “Valuations on some companies are good, and perhaps now is time to take a call to get into some of these stocks.”

It is hard to see a turn in the market at this point, but that is often when the time is right for brave investors, said Suk Inthirarajah, the director of Man Investments Middle East.

“There is a good chance they will see the fruit of their labour [in terms of oil market policy] in the coming months,” said Mr Inthirarajah. “If this is the case then markets, we believe, have overreacted by some way and we would expect a buying opportunity to present itself.”

Changes in healthcare policy might favour health insurers, for example. Although its shares are down substantially from their 2014 peak, the Saudi medical insurer Bupa Arabia shot up from 95 riyals in mid-December to end last year at 115 riyals.

Dubai Parks is another share that has bucked the trend, rising 54.7 per cent last year, and companies that stand to benefit from the push to economic diversity could be worth a look, says Mr Lakhotia. Also, demographics should support economic growth in the region.

“While many developed regions struggle with an ageing population ... the GCC and broader Mena region finds itself in a relatively unique and positive situation with its young demographic profile; this major positive influence should not be underestimated,” Mr Inthirarajah reckons.

It is a perilous environment for share investors.

“This is not a buy-and-hold market,” says more Lakhotia. “It will be volatile over the next year, you could see big swings, so getting the timing right will be crucial.”

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