Gulf markets head for broad, sunlit uplands

The Dubai Financial Market, considered a bellwether for the region, has risen 30 per cent from recent lows. Nikhil Monteiro / Reuters

GCC markets, like most "frontier" markets, have not been able to catch up with "emerging" and "developed" markets when they rebounded in 2009 and 2010.

Even if the Standard & Poor's GCC Composite is up 50 per cent from the lows of 2009, the index is still down almost 65 per cent from the 2008 peak, and has been flat during the past three years.

However, in the past few weeks things have changed.

The Saudi index has reached levels not seen since 2008, on significant volumes. The Dubai market, considered a bellwether for the region, is up 30 per cent from recent lows, which could be, by international market standards, defined as a bull market.

These market movements happened in a context of growing regional geopolitical uncertainties.

The escalating tensions between the West and Iran regarding its nuclear programme could lead to dangerous scenarios. In addition, the Syrian situation is further deteriorating, while Libyan authorities are still struggling to stabilise the country. But investors are giving more weight to other parameters.

Oil prices, which are a big part of the equation, are back near record levels. Last year, the average price for oil - using Brent as a benchmark - was 10 per cent higher than in 2008. At about US$120 a barrel, oil prices are now close to their three-year highs. The market tightness is mainly due to supply issues as there are disruptions in many medium-sized oil producers such as Sudan, Libya and Syria.

Moreover, crude oil inventories have reached a four-year low in the Organisation for Economic Cooperation and Development and spare capacities are at minimum levels. At the same time, oil production for GCC Opec members hit 15.8 million of barrels a day in January, a 12 per cent increase year on year. By balancing the market, these countries are reaching historically high levels of supply.

Another important aspect is the volatility of oil prices. The Gulf not only stands well below the long-term volatility average, but since mid-2010, it has entered the longest period of low price volatility for more than a decade. In such a context, GCC states benefit from record budget revenues and also great visibility on future income.

The private sector in the GCC should benefit from governments' responses to the Arab Spring. Many governments have offered citizens new jobs, salary increases and social benefits. The impact has been meaningful in sectors such as consumer goods, distribution and hospitality. The next round of expansionary fiscal policy will focus on infrastructure and property to improve the standard of living.

This new step should favour more sectors. Due to demographic pressure, governments have limited leeway to postpone or cancel these capital expenditures, so they are expected to occur in a short timeframe.

With an average break-even point for GCC public budgets slightly below $80 a barrel, governments can, without difficulty, implement such decisions. It is worthy of note that this fiscal boost is occurring when economies are already picking up.

Dubai, the epicentre of the financial crisis in the region following the Nakheel debt restructuring, is improving quickly. Key sectors such as transport, logistics, trading and hospitality are thriving and are operating above 2008 levels. Even with a banking sector still under pressure with a risk profile that could peak next year, it provides enough liquidity to the economy.

Market valuations for GCC markets - a market consensus this year of a price-earnings ratio of 11 times - are below their 10-year historical average and are in line with emerging markets. However, in a domestic retail-driven environment, market sentiment is an element that we must not discount.

The improving visibility we are monitoring should translate into a market re-rating. It is more a matter of time than anything else.

Sebastien Henin is portfolio manager at The National Investor

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