Pearls among perils in a period of unrest for the GCC

New apartments in Riyadh. Saudi Arabia's Shoura consultative council might pass a draft mortgage law. Waseem Obaidi / Bloomberg News

While the GCC felt the shocks of the global downturn and the regional unrest, those events have also shown the Gulf's resilience, and the picture is brightening, writes Saleem Khokhar

AGCC equity markets are characterised by factors that make them unique to other frontier and emerging markets.

The abundance of natural oil and gas, the strategic geographic location as a trade centre and the abundance of tourist attractions make for a powerful combination that has formed the bedrock of GCC economies.

Recent events in the Middle East and North Africa (Mena) have brought the political environment and social justice into focus, with unrest and regime change occurring in a number of countries.

GCC equity and property markets, much the same as global equity and property markets, have suffered heavy losses since late 2008 after feeling the full impact of the collapse of Lehman Brothers and the global financial crisis.

A number of GCC countries had embarked on aggressive growth strategies that used easy credit as the basis for rapid infrastructure development. The global crisis was felt acutely across the GCC as regional economies suffered capital losses at home and abroad.

GCC governments had by the end of last year acted to shore up regional economies, and although a number of issues remained, confidence had returned to the equity markets and expectations were for a strong 2011.

At the start of this year, little was expected in terms of social unrest in Mena, but political risk dominated equity markets in the first quarter. In February and last month, volatility in the Mena markets rose to an extreme. Initially, regional markets fell heavily as unrest in Tunisia, Egypt, Bahrain, Libya and Yemen was felt.

In March, the Dubai Financial Market General Index initially declined by 4 per cent and then increased by 15 per cent. Similarly in Saudi Arabia, the Tadawul All-Share Index initially declined by 10 per cent and then increased by 23 per cent.

It is important to note that GCC economies benefit from a natural hedge during regional uncertainty in that oil prices and commodity prices tend to rise. The present unsettled period has been no exception.

At the sector level, a number of notable events occurred last month. Regional property and construction companies experienced a strong rally after the Saudi government announced a 250 billion riyal (Dh245.66bn) housing package for Saudi nationals.

This was further supported by growing optimism that Saudi Arabia's Shoura consultative council might pass the draft mortgage law, after a ministry of housing was set up through a royal decree on March 25.

In the telecommunications sector, most of the regional operators were able to recover a significant portion of their share price declines, despite Etisalat abandoning its bid to buy the Kuwaiti telecoms company Zain.

For the UAE banking sector, preliminary data for February showed liquidity further improved. Net loans to deposits stood at 97.2 per cent compared with 98.7 per cent in January.

Provisioning for bad loans declined to 0.3 per cent from January to February, the lowest in the past six months, and now represents 5.3 per cent of average trailing gross loans, indicating that things are improving.

Looking forward, valuations for Mena equities remain compelling on most metrics.

Saudi companies will be among the first to release first-quarter results, and expectations are high for the petrochemical sector. But input prices have increased significantly for many companies as commodity prices continue to increase.

This increase may restrict margins in the near term as it may have been difficult to increase selling prices.

Overall, the fiscal position of GCC economies remains strong and differs markedly from that of North Africa, as GCC governments can and have increased subsidies and infrastructure spending.

For local equity markets, the positive turn came after King Abdullah of Saudi Arabia delivered a historic and powerful speech that incorporated significant economic and welfare reform. Thereafter, political risk for the region declined significantly.

As of the end of last month, the Mena markets continue to trade at a discount in comparison with other emerging and frontier markets.

But the social and economic packages recently announced by various governments will further boost economic growth and set the stage for what is likely to be a multi-year rally.

Saleem Khokhar is a senior fund manager in the asset management group at National Bank of Abu Dhabi. The views expressed are his own and not those of the bank