Market analysis: Mid-term outlook for GCC region is positive

The improvement in sentiment in Saudi following the announcement of reforms, decent earnings and recent cabinet reshuffle is promising, writes Saleem Khokar.

Saudi Arabia wants to increase Umrah and Haj pilgrim numbers as part of its National Transformation Plan 2020, as well as create a million jobs in the retail sector. Mosa’ab Elshamy / AP Photo

Global markets have been somewhat soft as of late, with renewed concerns over growth as Chinese and US data came in weaker than expected.

The weak recovery in China as highlighted by PMI data, credit growth outpacing GDP growth and an unusual commodity price rally not grounded in fundamentals suggests that currency speculation and wider market volatility could resurface as we approach the Fed’s policy meeting and the Brexit referendum in June.

On a positive note, aided by the dollar’s softness, China’s foreign currency reserves swelled by US$7.1 billion to $3.22 trillion in a second consecutive monthly increase.

With the earnings season nearly behind us the market’s focus will be on economic data and uncertainty around Brexit.

Saudi reforms

The unveiling of Saudi Arabia’s Vision 2030 plan was an important event for the GCC region. A subset of this vision, the National Transformation Plan (NTP) 2020, laid out targets for multiple non-oil sectors. A number of NTP targets went beyond just an expression of intent and were quantifiable with direct implications at the sectoral and company level. For example, the NTP intends to increase home ownership from 47 per cent to 52 per cent for Saudi nationals, drive religious tourism with an increase in Umrah visitors, create 1 million jobs in retail and drive a rapid increase in the mining sector’s contribution to GDP.

We see a number of these targets as quite achievable and have already witnessed progress on a number of fronts. In the housing sector white land tax, off-plan sales and loan-to-value increases have been introduced, capacity additions have been made for Umrah and Haj visitors in line with an expected increase in Umrah and Haj tourist visas, and Saudisation headroom is available within the retail sector.

The change in leadership at the ministry of energy, industry and mineral resources, the Saudi Arabian Monetary Agency, Ministry of Commerce and Investment and Ministry of Health is being seen as a sign of policy importance.

We expect company-specific and sector-level announcements to drive stock performance and anticipate stability in oil prices and the wider macro environment.

Regional investors are usually circumspect about such plans but in this instance the far-­reaching nature and economic impact of the reforms cannot be ignored. The basic aim is to eradicate inefficiencies and make it easier for businesses to increase potential.

With regards to oil markets, we do not see the departure of Ali Al Naimi as Saudi Arabia’s oil minister as an indicator of change in the country’s oil policy and maintain our view that it will have to be economics that will balance the oil market and not intervention.

Last month, Abu Dhabi successfully raised $5bn across five- and 10-year maturities, with about 60 per cent of the money raised from international investors. The bond issuance is expected to improve liquidity in the system either by slowing the domestic deposit draw down or through a liquidity provision to the banking sector. Following Abu Dhabi’s success, Qatar has appointed banks for a $5bn bond deal.

Petchem surprise

Meanwhile, earnings growth has been flattish for companies within the S&P Pan Arab LM Index.

The biggest surprise came from the petchem-dominated basic materials sector where expectations were muted. Petrochemical product pricing has held up well despite the weakness in oil prices. On the other hand, the consumer sector, where Saudi corporates dominate, delivered a major earnings miss, a reflection of weak discretionary spend trends and cost pressures.

The region’s banking sector delivered earnings that beat expectations largely due to net interest margin expansion as tighter liquidity fed into upwards loan repricing and lower than expected provisioning. In the UAE, first-quarter results from major banks were below market expectation because of higher cost of risk and margin pressure, due to an increase in cost of funding.

Regional outlook

The IMF last month lowered global GDP growth forecasts to 3.2 per cent from 3.4 per cent. Despite this we think global growth remains decent, especially when taking into account geopolitical and market realities.

The IMF forecast for Mena GDP growth now stands at 3.1 per cent, 50 basis points below previous estimates, with the GCC region expected to grow by 1.8 per cent. The UAE and Saudi Arabia are forecast to grow at 2.4 per cent and 1.2 per cent respectively down from an estimated 3.9 per cent and 3.4 per cent last year.

We have witnessed a strong recovery across GCC markets after the mid-January lows, with the recovery being supported by a positive global backdrop, a rebound in oil prices and decent first-quarter results. The improvement in sentiment in Saudi following the announcement of reforms, decent earnings and recent cabinet reshuffle is promising. We anticipate that market volatility will increase in the near term, with investors looking to realise profits as we approach Ramadan and the summer season. However, we believe that market weakness is likely to be transitory and that the medium-term outlook remains positive.

Saleem Khokhar is the head of fund management at National Bank of Abu Dhabi