Although confidence in Arabian Gulf equities has been hit in recent weeks by global market volatility, investors should consider positioning their portfolios carefully for when markets rebound. And the good news for investors is that company fundamentals are actually decent.
The region’s markets have been caught up in an emerging markets sell-off, with slowing growth in China and the prospect of a rate rise from the Federal Reserve, which did not materialise.
In the hydrocarbon-rich GCC countries, investors are further spooked by a 50 per cent drop in global crude oil prices since mid-2014, which is putting pressure on government budgets. The fear is that a spending squeeze will cause projects to be delayed or scrapped, and that this will hit corporate growth.
But most blue chip companies in the region are in much better shape today than they were before the 2008 global financial crisis – and are well positioned to weather a fiscal slowdown.
Over the past seven years, most of the large corporates have deleveraged and improved operational efficiencies. Many have accumulated significant cash reserves and are therefore in a position to maintain capital expenditure to fund their growth plans.
Aldar Properties, the largest real estate developer in Abu Dhabi, is a good example. The company merged with competitor Sorouh Real Estate, reduced its leverage significantly, with net debt/equity falling from 65 per cent in 2013 to 30 per cent in 2014, and now has a good balance between stable income from its retail and hotel properties and more fluctuating income from developing homes.
Notably, the region’s banking sector is also in good shape, with healthy capital adequacy ratios, which allows the sector to continue to finance corporate growth and infrastructure projects.
Abu Dhabi Commercial Bank (ADCB) and FGB are notable examples, with both currently recording tier-one capital ratios of 16 per cent, much higher than the typical regulatory requirement of 12 per cent.
Samba Financial Group and National Commercial Bank in Saudi Arabia, and Qatar National Bank are all in similar positions. Furthermore, central banks and regulators have put in place stringent criteria for real estate lending by financial institutions. Such rules hardly existed at the time of the last crisis.
Companies such as the Saudi Arabian dairy producer Almarai and the UAE district cooling company Tabreed have also shown that they are increasingly competent at responding rapidly to changing business conditions by enhancing their operational efficiencies and cost management.
In such an environment – where markets have suffered sharp sell-offs and confidence is still fragile – investors should look to find value in cash-generative companies that offer an attractive, consistent and well-supported dividend yield.
The average dividend yield in the GCC is currently around 4.3 per cent, compared to an average of about 3.5 per cent in recent years. This average actually masks a wide range, with some listed companies offering a yield as high as 7 per cent.
Value can also be found in companies with earnings that are relatively uncorrelated to any impact from lower oil prices, such as those benefiting from the strong growth in tourist arrivals in the UAE. Such firms tend to generate their income from malls or hotels, but in the current climate it’s important to distinguish between seasoned operators and some of the more speculative names in the sector.
Looking ahead, it seems unlikely in the near term that the oil price will return to the US$100-plus per barrel levels sustained from 2011 to mid-2014. It’s therefore important for investors to adapt investment strategies and become more selective.
Mohammed Salih Al Hashemi is executive director of asset management at Invest AD
