Oil price weakness continues to pressurise GCC equities

(MENAFN- The Peninsula)

By Satish Kanady

DOHA: Weakness in oil prices will continue to keep GCC equities under pressure. The region’s markets would continue to face pressures in 2016 as well and have limited upside potential from here on leading asset management and investment banking firm Alkabeer Capital noted in its “Global Outlook 2016” issued yesterday.

The Saudi-based bank recommended investors to selectively invest in Gulf markets with special focus on companies that are not largely dependent on the hydrocarbon sector. Also considering that GCC equities are underpinned by relatively high dividend yields it further recommended investors to focus on companies with good balance sheets and ability to maintain their dividend payouts for a prolonged period.

“We are cognizant of the fact that GDP growth among the Gulf countries is likely to take a hit from low oil prices and as regional governments take measures to scale back expenditures in 2016. Additionally uncertainty about the future of oil prices is likely to keep Gulf markets volatile during the course of 2016. Any agreement around oil production could result in investor interest returning back to GCC equities” the research note said.

On the valuations front the one year forward price to earnings ratio on the Bloomberg GCC 200 index is trading at 12 times much lower than the 10-year historical average of 15 times suggesting that valuations across these stocks are compelling. However the investment bank do not see any major supporting factors for 2016 that could trigger an upside across the Gulf exchanges. “We are ‘Underweight’ on GCC stocks albeit the momentum across these markets is highly dependent on oil prices and therefore any major movement in crude prices could have a significant bearing on Gulf bourses”.

GCC equity markets witnessed high volatility in the year 2015. In the first half of 2015 most benchmark bourses in the GCC region ended in positive territory amid a partial recovery in oil prices. Opening up of the Saudi Arabian markets to foreign investors was one significant reform in early 2015 that supported regional sentiment. However GCC markets more than offset their first half gains and plunged in 2015 to trade close to multi-year lows with all key Gulf indices barring Abu Dhabi’s exchange dropping more than 10 percent. Mid-year geopolitical tensions in Yemen weighed on regional bourses while an unfavorable outcome in December’s semi-annual Opec meeting triggered a major drop in crude oil prices and sparked a sell off across these markets.

According to the analysts borrowings in the GCC is expected to rise going forward. They noted fiscal buffers among the GCC countries have eroded in this low oil price environment as GCC governments have broadly maintained their spending levels despite a higher drop in revenues. Recent liquidity concerns in the banking sector have caused a spike in benchmark interest rates across the Gulf countries. Higher borrowing costs in the region could be a net negative for the region’s non-oil sector especially with the GCC economies already pressurized by the developments in the hydrocarbon sector.

Forward contracts on GCC currencies also a proxy to gauge investor sentiment towards the region have risen to multi-year highs amid speculation that the mounting fiscal pressure might cause the Middle Eastern nations to de-peg their currencies. Most of the concerns on de-pegging have partially eased after central banks in Saudi Arabia Kuwait UAE and Bahrain raised borrowing costs to mirror the US Federal Reserve’s move to hike interest rates.The Peninsula