GCC equities may turn around next year: market report

Regional privatisation deals including Aramco IPO and reforms may trigger rally, says Nomura

Nomura is positive on GCC markets. Faisal Al Nasser/Reuters

The GCC equity markets that have missed the global equities bonanza this year, may rally in 2018 as economic reforms start bearing fruits and investor enthusiasm rise on the back of Aramco share float and anticipation of market upgrades, according to a market report.

“The broadly accepted view is that the equity markets will remain in a tight trading range until around the middle of next year,” Tarek Fadlallah, the chief executive officer at Nomura Asset Management Middle East said in the ‘Decade of Disruption’ research report.

Several factors, he said, will come into focus post Eid al Fitr in 2018 including rising speculation over the inclusion of the Saudi Tadawul, the biggest Arab bourse by market capitalisation, into MSCI Emerging Market and FTSE indexes, that will draw out domestic buyers ahead of any formal announcements. Anticipation over Saudi Aramco’s initial public offering, which the kingdom said is on track for 2018, and other major privatisations deals across the region may also lure international investors to regional equities markets, he added.

The series of reforms announced over the past year should also begin to yield some initial results, or at least provide increased visibility, which will help reassure investors, according to the report.

“With expectations well anchored, there is scope for upside surprises from bigger than expected fiscal stimulus packages, lower bank reserve ratios that encourage lending, a spike in oil prices beyond current forecasts or an easing in geopolitical tensions — but these are low probability scenarios,” Fadlallah noted.

Governments in the Arabian Gulf region, which accounts for about a third of the world’s proven oil reserves, are implementing fiscal reforms and are trying to transform their economies with privatisation being the main pillar of diversification strategy. Saudi Arabia has taken the lead with plans to unlock value in several state assets including Aramco’s share float, which could yield estimated $100bn.

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The six-member economic bloc still relies heavily on the sale of crude for revenues and a fall in oil prices since the mid-2014 peak of $115 a barrel has forced the governments to cut spending slowing the pace of economic growth, which has dented the investor confidence. The MSCI GCC Countries index has dropped 2.6 per cent since the beginning of this year, which compares to the 35 per cent return by MSCI Asia and multiple record highs for the S&P 500 index in the US this year.

On a positive note, however, the evolution of the capital markets across the region, Saudi Arabia in particular, has been “impressive with tremendous work being done by the Capital Market Authority and the Tadawul in preparing for deeper, more diverse and more transparent markets,” he said.

“There are high expectations that the elevation of local markets, in Kuwait and Saudi Arabia for example, into the major emerging market indices will lead to huge foreign buying, especially among indexed funds.”

Saudi Arabia last month announced several major investment initiatives at the three-day Future Investment Initiative in Riyadh including the $500bn Neom project, which the report said is a reflection of the country's economic policy ambitions, indicating dreaming big is perhaps necessary to meet the enormous challenges. Saudi Arabia is not the only Arabian Gulf state pushing ahead with ambitious development plans amid tougher economic conditions. Other sovereigns are also looking to carry on building the social and hard infrastructure schemes in partnership with foreign investors.

“Development ambitions across the region are encouraging but it’s obvious that a lot of work is still needed to attract foreign direct investment and facilitate greater participation in the local economies,” he said “Sovereign wealth funds, working with private investors and public institutions, can help smooth the transition and fund economic transformation.”

On the global front, Mr Fadlallah said the economy is performing well with synchronised growth underpinned by rising confidence, easy monetary conditions and a willingness to allow systemic debt to increase without any defined limits.

“The capital markets appear relaxed about the Fed’s gradual balance sheet unwinding so long as the European Central Bank and the Bank of Japan continue to fund their asset buying trading desks with freshly printed Euros and Yen,” he said. “The JPM global composite PMI data and OECD unemployment rates have been trending favourably and are consistent with forecasts for continued growth.”

He however, was critical of equities valuations and said are not “justifiable or sustainable”.