Unusual events but it is still possible to reap good rewards

Some GCC equities offer substantial dividend yields and capital growth prospects, says Saleem Khokhar, the head of equities at NBAD.

Commodities have been in focus for many investors over the past year, in particular gold. Reuters
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GCC markets have over the past few months been overshadowed by events in Europe and the US.

Investor risk appetite was severely curtailed on the back of the US government debt downgrading by Standard & Poor's, a slew of negative economic data in America and Europe and mounting concerns over euro-zone debt.

Speculation surrounding a third round of quantitative easing have pushed the US 10-year treasury yield to less than 2 per cent as uncertainty has driven investors to haven assets. Last month, GCC markets on a relative basis were defensive compared with other emerging markets, finding some support from higher government spending and compelling valuations.

Investors requiring yield in the current environment find themselves in an unusual situation as dividend yields available from many companies surpass yields on government bonds and even on debt issued by the same company. It is possible to build a sensible regional equity portfolio that will produce a cash yield of well over 5 per cent.

I would imagine that some investors have given up on equities, but I believe they continue to play a vitally important role in any long-term portfolio and that today's valuations offer a particularly attractive entry point.

Cash and fixed income provide safety within a portfolio but do not have the ability to provide protection against the eroding effect of inflation. For this you need to hold real assets such as equities. Long-term investors in shares such as National Bank of Abu Dhabi (NBAD) or Etisalat will have seen substantial cash dividend increases over time.

Although there is some good value in local bonds, there is undeniably more capital upside potential in local equities. Indeed, many could double without looking expensive.

Commodities have been in focus for many investors over the past year, in particular gold. We have actively recommended commodities over the past year and still see attractions but now believe the steady stream of very high income that is available in regional equities gives them the edge. Of course, for those investors who don't currently need the income, it can be reinvested to compound returns.

At odds with the current market perception is that many corporate balance sheets are in fact quite healthy. Since the eruption of the financial crisis in late 2008 companies have been deleveraging and building up cash reserves. Equities in general offer excellent value compared with other asset classes but when one focuses on equities that have significant dividend yields and significant growth prospects the case for the long-term income investor becomes quite compelling.

Consensus and in-house NBAD research highlight many GCC equities that yield more than 6 per cent and yet on a fundamental basis offer capital appreciation potential in excess of 25 per cent over two years. A case in point would be Doha Bank, where the annual yield of the stock is more than 7.5 per cent while potential capital appreciation is remarkable.

Near-term catalysts for the GCC market include a possible upgrade for the UAE and Qatar by MSCI with an announcement expected by the year end, continued growth in bank lending and stabilisation of the global environment.

NBAD-AMG have conducted extensive research into fundamentally strong but high-yielding GCC equities that are likely to continue to pay enhanced yields. I believe it is an opportune moment for investors to construct a portfolio that could comfortably offer a dividend yield in the region of 5.75 per cent while offering significant capital appreciation potential over two years.

Saleem Khokhar is head of equities at National Bank of Abu Dhabi