Market analysis: Third-quarter reporting season will assess the summer

An investor in Riyadh. Reforms to the Saudi market that allow foreign direct investment will probably encourage wider participation in future regional offerings. Waseem Obaidi / Bloomberg

After several months of softening economic and corporate growth across the region, the upcoming third-quarter results reporting season will enable investors to gauge how corporates have fared over the summer months and indicate future near-term trends that will drive the performance of the GCC market.

The low oil price story has been adequately priced into regional market valuations over the past couple of years and foreign investor flows into the GCC will be driven mainly by market developments, such as the inclusion of Qatar in the FTSE Secondary Emerging Markets Index, and the further easing of Qualified Foreign Investor rules in Saudi Arabia.

In timing their entry or exit into the GCC, foreign investors will assess the attractiveness of these markets against other emerging and frontier markets, as they typically have the choice to shift their asset allocations to markets that offer better value and risk-reward profiles. Given the significant uncertainties that a number of other emerging and frontier economies, such as in Latin America, are currently facing, regional markets will stand to benefit.

The banking sector and loan books data in particular will provide a key barometer of the health of regional economies, and potential loan repayment challenges for some companies in the SME sector.

A number of GCC banks such as ADCB offer an above-average dividend yield of more than 5 per cent with high dividend cover and good cash flow generation underpinning their ability to sustain their payout ratios – an ideal investment in the current climate.

The telecoms sector also provides many opportunities for investors to find growth owing to its resilient earnings and cash flow generation throughout the cycle, underpinned by the quasi-monopolistic positions most GCC telecom operators hold in their local markets.

Earlier this summer we witnessed the milestone announcement of the merger of FGB and NBAD, but we do not expect any notable corporate activity for the remainder of the year, except for a few exceptions in Saudi Arabia.

However, we can expect more clarity on the initial public offering of Saudi Aramco, slated for next year. In the meantime, recent and expected regulatory changes in the GCC (such as Saudi Arabia permitting foreign investors to participate in local IPOs) will probably encourage wider participation in future regional offerings.

Further growth can be found in the bond market. Select GCC bonds – especially those issued by government related entities (GREs) offer attractive upside, in particular those whose ratings by credit agencies are at a disconnect with the risks these entities realistically face, given their ownership support.

So far, the regional debt market has been active due to heavy sovereign issuances from several GCC nations and steady issuances from financial and corporate names across the rating curve and maturities. The outlook remains broadly positive and the bonds markets seem to have largely priced in a possible 25 basis points US Fed rate hike in December.

Between US$20 billion and $25bn of new issuances is expected until December, with a potential Eurobond issuance from Saudi Arabia (expected to be between $10bn and $5bn), along with anticipated issuances from the sovereigns of Kuwait and Dubai as well.

Investors should closely monitor discussions between Saudi construction major Saudi Oger and creditors over a potential restructuring of its crippling debt, to stave off a collapse of the firm, given the direct spillover impact these developments would have on creditors ranging from Saudi banks to subcontractors and suppliers, and the wider impact on regional investment sentiment.

When looking at the GCC markets it is often difficult to speak in terms of entire sectors as being undervalued or overvalued. Historically, a focus on stock selection and market allocation plays a consistently greater role in delivering superior returns when compared to sector allocation, and upcoming third-quarter results will enable investors to narrow their focus.

Mohammed Al Hashemi is the executive director of Invest AD Asset Management.

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