Jul 25, 2012
Kuwait Financial Centre "Markaz"
RESEARCH
July 2012
GCC Outlook 2H12
Lack of Domestic Triggers Mean Dancing to Global Problems
The first half of 2012 was mostly about markets reacting to events in the developed world. The regional markets clearly lacked major triggers except for the disappointment from MSCI, which came in June. Market talks, early in the year, about Saudi Arabia allowing foreign investor participation did not see any constructive development as well. GCC markets mostly reacted to the series of events that unfolded in Europe. Concerns about Chinese hard landing also affected market sentiment due to its impact on commodity demand. In our previous note in January, we adopted a Neutral view of the markets (Table 1) due mainly to lackluster market activity which was overshadowing more positive indicators on the economy and earnings. We had adopted a Positive stance on Saudi Arabia and Qatar due to positive economic growth, earnings potential and market liquidity. We were wrong on Qatar and Dubai. While Qatar surprised us, we still maintain our Neutral view on Dubai. Attractive valuations and earnings growth from a lower base possibly helped Dubai post gains in 1H12. But we are still skeptical about its real estate recovery and issues surrounding its debt problems. Table 1: Previous Recommendations & Market performance
Research Highlights: Reviewing the first half of 2012 and projecting the remainder of the year based on an assessment of various drivers that specifically affect the performance of GCC stock markets.
Markaz Research is available on: Bloomberg - Type "MRKZ" Thomson Research, Reuters Knowledge Nooz Zawya Investor ISI Emerging markets Capital IQ FactSet Research Connect TheMarkets.com
M.R. Raghu CFA, FRM Head of Research +965 2224 8280 rmandagolathur@markaz.com Madhu Soothanan Senior Research Analyst +965 2224 8000 Ext: 4603 MSoothanan@markaz.com Animesh Tulsyan Analyst +965 2224 8000 Ext: 4607 atulsyan@markaz.com
Saudi Arabia
Kuwait
Abu Dhabi
Dubai Neutral 7.3%
Qatar Positive -7.5%
Oman Neutral -0.1%
Bahrain Neutral -1.5%
January-12 Positive Neutral Neutral 1H 2012 -0.4% Return (%) 4.6% -0.8%* 1.9% Source: Stock Exchanges, Markaz Research *Kuwait Weighted Index return
For the rest of 2012, we are still sticking with a Neutral view for most of the markets albeit with a Positive bias due to comeback of market liquidity and robust government sector growth. We turn Positive on Saudi Arabia and Kuwait due to positive growth and increased liquidity. We are Neutral on Qatar due to disappointments in earnings growth and liquidity. Table 2: Current Recommendations
Title Saudi Arabia Positive Neutral Positive Neutral Positive Kuwait Positive Positive Positive Neutral Positive UAE Positive Positive Neutral Positive Positive Abu Dhabi Dubai Positive Neutral Qatar Positive Positive Neutral Positive Oman Positive Positive Bahrain Neutral Positive
Kuwait Financial Centre "Markaz" P.O. Box 23444, Safat 13095, Kuwait Tel: +965 2224 8000 Fax: +965 2242 5828 markaz.com
Economic Factors Valuation Attraction Earnings Growth Potential Geopolitical Developments Market Liquidity
Negative Negative Neutral Negative
Negative Negative Positive
Overall Market View
Positive
Positive
Neutral
Neutral
Neutral
RESEARCH July 2012 So what happened in 1H12?
The first half of 2012 saw GCC markets reacting mostly to global news flow especially from the Europe. After a tough 2011, world markets staged some recovery in the first quarter of 2012. But the recovery was short lived as European debt woes weighed heavily on global markets in the second quarter. After a series of negative news from Europe, some respite came exactly on the last trading day of the first half after a marathon meeting at Brussels. Policymakers reached a consensus to recapitalize banks directly with bailout funds once a banking supervisor is set up for the Euro Zone. At the beginning of 2012, we predicted MSCI upgrade of regional indices to `Emerging Market' status to be the most important trigger for markets. But late in June, MSCI announced1 that UAE and Qatar will continue as Frontier markets and will remain under review for potential reclassification in June 2013. The S&P GCC Composite index, which gained 14.7% in the first 3 months, ended the half year at 0.97% gain. Anemic growth in developed countries, combined with slowdown in emerging markets (especially China) pushed down Oil prices in the first half. Brent Crude lost 8.9% in the first half after a good 14.4% rally in the first quarter. OPEC reduced its 2012 world oil demand growth forecast from 1.1mn barrels per day (bpd) at the start of the year to 0.9mn bpd currently. GCC heavyweight Saudi Arabia ended the first half with a 4.6% gain in the Tadawul index. Abu Dhabi (+1.9%) and Dubai (+7.3%) markets also closed in green. The big surprise in GCC came from Qatar which lost 7.5% in the first half. At the beginning of 2012, Qatar had everything going right and we were `Positive' on Qatar on all our evaluation parameters. Just to recap, Qatar was the only GCC country which ended 2011 with positive stock market returns (+1%). Its economy grew at 19%, corporate earnings rose 28%, stock market liquidity was up 22% and the state is politically a lot safer than other GCC countries with government spending being responsible for most of its growth. This is what one analyst wrote about Qatar at the beginning of 2012 -
S&P GCC index gained 0.97% in the first half, after a 14.7% gain in 1Q12
Saudi Arabia ended the first half with a 4.6% gain
"What is better than having a simple fundamental story that says: a Government of a country that possesses the world's third largest gas reserves, representing 14% of the global reserves, is your partner, client, creditor, borrower and protector. Banks for example, are 35% owned by the Government; lend 36% of their total loans to the Government and Government deposits represent 32% of their system's deposits."
So what turned the tide in 2012 for Qatar? We will try and do some post mortem analysis.
1
http://www.msci.com/eqb/pressreleases/archive/Mkt_Class_2012.pdf
Kuwait Financial Centre "Markaz"
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RESEARCH July 2012
1. Depressed Gas Prices The natural gas glut in the US because of increased production from Shale and other unconventional sources has decreased North American prices to historically low levels. Qatar, being the largest exporter of natural gas in the world, is understandably affected by lower prices. Natural gas prices vary considerably among different parts of the world. And given that Qatar's main export partners are Asian countries, the country has not experienced a major decrease in gas revenues. But the sentiment seems to be changing and North American producers are also increasingly looking at gas exports to Asia. While on one hand, Qatar is trying to sign long term agreements to sell natural gas, some Asian buyers have rejected the high LNG prices Qatar is quoting2. So, Qatar will clearly feel competitive pressures going forward. Figure 1: Natural Gas Prices Henry Hub (U$/mmbtu)
14 12 10 8 6 4 2 0 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Sep-08 Sep-09 Sep-10 Mar-08 Mar-09 Mar-10 Mar-11 Sep-11 Mar-12
The big surprise in GCC came from Qatar which lost 7.5% in the first half.
Source: Thomson Reuters Eikon
2. Slower Growth in GDP & Corporate Earnings At the beginning of 2012, we were Positive on Qatar on all our evaluation parameters After experiencing double digit growth rates for the last 6 years, Qatar's GDP growth rate is expected to come down to normal levels going forward. While infrastructure spending is expected to be robust, investments in upstream hydrocarbon sector will tail off due to culmination of its 20-year hydrocarbon investment program in 2011. With depressed natural gas prices and comfortable fiscal position, we see little reason in why Qatar will look at further upstream investments. With reduced government spending, capital formation will get affected leading to slower growth in corporate earnings. In 1Q12, net income of listed Qatari companies grew by only 2% YoY. Lower commodity prices and slow banking sector growth is a negative for corporate earnings.
2
India & Pakistan have reportedly rejected Qatar's high prices and looking at other cheaper sources for LNG.
Kuwait Financial Centre "Markaz"
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Jun-12
Jun-08
Jun-09
Jun-10
Jun-11
RESEARCH July 2012
Figure 2: Qatar Real GDP Growth Rate (%)
30 26.2 25
Qatar's GDP growth is expected to come down to normal levels going forward
20 15 10
18.0
17.7
18.8 16.6 12.0
6.0 5 0 2006 Source: IMF 2007 2008 2009 2010 2011 2012E
4.6
2013E
3. Declining Liquidity In 2011, value traded in Qatar exchange rose 22% to reach USD 22.6bn. Qatar and Saudi Arabia were the only exchanges which saw a rise in value traded in 2011. But in the first half of 2012 value traded was down 25% YoY to USD 9.7bn Qatar and Oman being the only markets to witness a liquidity drop. Limited room for foreign investors, wait for MSCI's upgrade decision and attractive valuations in other regional markets might have dented investor participation. Figure 3: Qatar Value Traded (USD Mn)
14,000 12,000 10,000
In the first half of 2012, value traded in Qatar was down 25% YoY to USD 9.7bn
8,000 6,000 4,000 2,000 0 Jan-11 Jan-12 Apr-11 Apr-12 1H11 Jun-11 Mar-11 Mar-12 May-11 May-12 Feb-11 Feb-12 Jun-12 1H12
Source: Zawya, Markaz Research
Kuwait Financial Centre "Markaz"
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RESEARCH July 2012 A. Looking Back
The overall GCC markets as measured by the S&P GCC index gained 0.97% in the first half of 2012 after losing 8% in 2011. Except, Saudi Arabia and UAE, all other GCC markets were down for the year. Dubai is the largest gainer, increasing 7.3%. Kuwait and Oman markets ended the first half almost flat. At the beginning of the year we were Positive on Saudi Arabia. This was mainly due to increased economic activity driven by rise in government spending and expected growth in corporate earnings. We also found solace in terms of attractive valuation and market liquidity which has been picking up. We were Neutral on Kuwait at the start of 2012 due to poor market conditions, muted economic growth and continued drying up of market liquidity. Valuations were stretched when compared to other GCC countries and stock markets started 2012 on the back of 4 consecutive years of liquidity decline. We took a Neutral stance on both Abu Dhabi and Dubai. The view on Abu Dhabi is predicated mainly due to weak market conditions and the possibility of additional aid being extended to Dubai. Downside risks for Dubai came from troubled Government Related Entities (GREs), which continued to grapple with a debt overhang of about USD 15bn. We had a positive view on corporate earnings and valuation due to bottoming out of the country's real estate sector. We were Positive on Qatar on all counts owing to its high economic growth prospects, healthy banking sector and heavy government support in addition to increasing liquidity. Although we predicted growth to moderate because of reduced investment in natural gas production, government spending on other infrastructure projects was forecasted to be robust. We maintained our Neutral view on Oman at the start of the year due to due to moderate earnings growth, lower liquidity and declining economic activity. We were concerned about the impact of political turmoil on Sultanate's growth path. We maintained a Neutral view on Bahrain (although it is verging on Negative) due to weakened corporate earnings outlook in addition to negative investor sentiment and market liquidity. Negatives in our forecast were because of geopolitical tensions, risks to the banking system and falling attractiveness of Bahrain as financial hub. We were skeptical about the country's economic growth and control of government expenditure.
At the beginning of the year we were Positive on Saudi Arabia
We were Neutral on Kuwait on UAE at the start of 2012
T h e Q a t a r i m a
Kuwait Financial Centre "Markaz"
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RESEARCH July 2012 B. What to expect for the rest of 2012
The overall economic scenario is Positive for all GCC nations except Bahrain We believe that there are host of factors that can influence the markets during the rest of 2012. We have identified five such factors that we feel will directly impact market performance. Based on its importance, we provide subjective weights to each of these factors (Figure 4). An explanatory description for all the five factors can be found in Appendix 1. Figure 4: 5-Force Framework
Source: Markaz Research
1. Economic Parameters
Real GDP across the GCC is likely to show a growth of about 5.3% in 2012 followed by a growth of 3.7% in 2013 The overall economic scenario is Positive for all GCC nations except Bahrain which remain Neutral in our view owing to lower growth and constrained fiscal balance position. i. Real GDP Growth Forecast Real GDP growth across the GCC reached 8% in 2011, as oil production in the GCC increased to compensate for lost production primarily from Libya. Growth in 2012 is expected to moderate to 5.3% level slowing down to 3.7% in 20133. Dwindling global growth leading to reduced commodity demand and lower private sector activity are seen as possible reasons for growth to be moderating the region.
3
IMF Estimates
Kuwait Financial Centre "Markaz"
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RESEARCH July 2012
Growth in Saudi Arabia is expected to be at 6% in 2012 due to high oil revenues. However, this is expected to fall to about 4.1% in 2013. Kuwait's GDP growth is expected to slow down to 6.6% in 2012, before decreasing to 2% levels in 2013. Qatar, which experienced double digit growth rates over the last few years, is expected to drop to the more sustainable levels going forward. 2012 GDP growth is expected to be at 6.2% in 2012 and 4.5% in 20134. ii. Inflation Both Saudi Arabia and Kuwait saw jumps in inflation during 2011 due to government grants and subsidies. According to the IMF, inflation was around 5% in 2011 for both the countries. In 2012, Saudi inflation is estimated to continue at the same level while Kuwait's CPI is expected to decrease to 3.5%. UAE & Bahrain should see inflation stay in the 1-2% range while Qatar & Oman will experience price increase of 3-4% in 2012. iii. Fiscal Balance Fiscal balances are expected to show a jump in 2012 as well due to high oil prices and decreased public spending when compared to 2011. The real risk here is the fall in global crude prices which might strain the balances. Oil prices are down 8.9% YTD. Bahrain is the only GCC country which is expected to witness a central government deficit in 2012. iv. Current Account Balance According to the IMF, the consolidated current account balance of the GCC is estimated to reach 25.2% of GDP in 2012 with overall fiscal balance of 15.3% of GDP. Kuwait continues to maintain the highest ratio, at 46% of GDP. Saudi Arabia and Qatar are also expected to see healthy current account balances of 28% and 32% respectively in 2012. IMF estimates consolidated current account balance of the GCC to reach 25.2% of GDP in 2012 v. Broad money growth Money supply which witnessed a healthy growth in 2011 is expected to continue the same trend in 2012 as well. GCC central bankers are cautious to grow money supply on concerns of stroking inflation thus making it difficult to maintain the currency peg. During 1Q12, except Qatar all other countries saw growth in money supply on YTD basis. UAE's money supply, which experienced the lowest growth in 2011 at 5%, rose 7.4% YTD in the first quarter.
UAE & Bahrain should see inflation stay in the 1-2% range
4
General Secretariat for Development Planning (GSDP Estimates)
Kuwait Financial Centre "Markaz"
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RESEARCH July 2012
Table: 3 Economic Parameters Summary
Overall Scores Economic Growth Inflation Fiscal Balance Current Account Balance Broad Money Growth Saudi Arabia Positive Neutral Positive Positive Positive Kuwait Neutral Positive Positive Positive Positive UAE Neutral Positive Neutral Positive Positive Qatar Positive Positive Positive Positive Neutral Oman Positive Positive Positive Neutral Positive Bahrain Neutral Positive Negative Neutral Neutral
Bahrain is the only GCC country which is expected to witness a central government deficit in 2012
Qualitative Assessment Positive Source: Markaz research
Positive
Positive
Positive
Positive
Neutral
2. Valuation Attraction
Decrease in market prices are compensating for normalizing corporate earnings in the GCC. Valuations in regional markets remain attractive when compared with other emerging market countries. But foreign ownership limits and nascent capital markets regulation is failing to attract institutional money. Bahrain, UAE and Oman look attractive when looked at from a price earnings ratio point of view. GCC markets continue to be attractive in terms of dividend yield. We turn Neutral on Saudi Arabia primarily because of high P/B ratio (on a relative basis). Table: 4 Valuation Parameters Summary
P/E 2010 2011 1H12 Saudi Arabia 16.0 12.5 12.0 Kuwait 20.0 13.8 15.1 UAE 11.0 9.4 9.4 Qatar 12.3 11.6 11.4 Oman 12.0 10.9 10.5 Bahrain 12.0 8.1 7.8
P/B
Saudi Arabia 1H12 1.8
Kuwait 1.3
UAE 0.9
Qatar 1.8
Oman 1.6
Bahrain 0.9
Valuations in regional markets remain attractive when compared with other emerging market countries
Dividend Yield 2010 2011 1H12 Qualitative Assessment
Saudi Arabia 2.4 3.7 3.3
Kuwait 3.5 3.5 3.4
UAE 3.1 4.8 4.7
Qatar 2.9 3.7 3.6
Oman 5.1 4.9 4.7
Bahrain 2.4 5.2 4.9
Neutral
Positive
Positive
Positive
Positive
Positive
Kuwait Financial Centre "Markaz"
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RESEARCH July 2012
3. Earnings Growth Potential
In our January 2012 report, we expected to see an overall growth of 18% in GCC corporate earnings in 2012, fueled by growth in Saudi Arabia and turnaround in Kuwait and the UAE. During 1Q12, GCC corporates posted overall earnings growth of 4% when compared to 1Q11 During 1Q12, GCC corporates posted overall earnings growth of 4% when compared to 1Q11. Excluding a large one-off gain in 1Q115, GCC aggregate corporate profits increased 12% YoY. Total earnings, which came in at USD 14.6bn, were an increase of 45% over 4Q11. Large sequential increase in earnings is due to dismal performance by companies in 4Q11 on account of increased last quarter provisioning by banks and weak petrochemical prices. Incremental growth in earnings was driven by contributions from Saudi Arabia, UAE and Kuwait (adjusted for one-off). Earnings of Saudi Arabian companies totalled USD 6.7bn, an increase of 15% YoY and 28% QoQ. Softening global petrochemical prices affected commodity earnings in the country, which was well compensated by stable performance from Banks which is expected to continue for the rest of 2012. Kuwaiti companies saw its earnings recover in the first quarter of 2012 after three consecutive quarters of de-growth. UAE companies posted earnings of USD 3.1bn - the highest during the last 10 quarters. After a healthy 2011, Qatar's earnings are starting to stabilize. Aggregate profits grew only 2% YoY to USD 2.5bn. Among sectors, Banks and Real Estate companies delivered good performance with earnings growth of 9% and 61% YoY respectively. Commodity companies reported a mixed set of numbers because of volatile global prices. Commodity earnings decreased 8% YoY but rose 26% sequentially to USD 3.1bn. Figure 5: Earnings Trend GCC Long-Term (USD mn) Commodity companies are expected to report lackluster numbers because of volatile global prices
70,000 60,000 50,000 40,000 30,000 20,000 10,000 2006 2007 -46% 2008 2009 2010 2011 6% 49,141 31% 41,314 34,749 34,698 0% 19% 27% 20% 0% -20% -40% -60% 64,585 52,339 80% 60% 40%
Source: Thomson Reuters Eikon, Markaz Research
5
Kuwait's Wataniya Telecom booked a fair value gain of USD 959mn in 1Q11.
Kuwait Financial Centre "Markaz"
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RESEARCH July 2012
At the beginning of the year, we were positive on all countries except Oman and Bahrain in terms of earnings growth given healthy profits from commodity companies and Banks. We expected some turnover stories in real estate sector as well. Given the earnings trend in first quarter and developments after that, we are skeptical about our forecasts. Falling global commodity prices, modest growth in bank lending due to concerns on deleveraging & demand slow down and lack of positive developments in real estate are some of the reasons for our cautious stance. Table 5: Earnings Growth Potential
Earnings Growth 2003 2004 2005 2006 2007 2008 2009 2010 2011 Saudi Arabia 64% 48% 45% 16% 7% -46% 25% 33% 19% Kuwait 105% 21% 107% -18% 75% N.M. N.M. N.M. -18% UAE 46% 72% 137% 4% 39% -15% -28% -51% 119% Qatar 73% 65% 72% 25% 37% 16% 26% -14% 28% 2% Oman 0% 150% 26% 18% 49% -19% 14% 14% -17% 0% Bahrain 123% 95% 6% 31% 28% -28% N.M. N.M. 65% -2% Overall GCC 72% 48% 72% 6% 31% -46% 0% 19% 27% 12%
At the beginning of the year, we were Positive on all countries except Oman and Bahrain in terms of earnings growth
1Q12 YoY* 15% 41% 8% Qualitative Assessment Positive Positive Neutral Source: Thomson Reuters Eikon, Markaz Research
Neutral Negative Negative *Adjusting for one-off items
4. Geopolitical Developments
We have used Economist Intelligence Unit's (EIU) Political Stability Risk ratings to assess the geopolitical factor. Political turmoil in 2011 hit Oman and Bahrain in terms of attractiveness. Based on EIU's rating we turn Neutral on most GCC countries except UAE and Qatar which we rank positive. Given the trend in 1Q12 and developments after that, we are skeptical about our 2012 earnings forecasts Table 6: Political Stability Risk
Rating Previous Current Scores Previous Saudi Arabia D D Saudi Arabia 70 Kuwait C C Kuwait 55 55 Neutral UAE C C UAE 50 45 Positive Qatar B B Qatar 40 40 Positive Oman D D Oman 65 65 Neutral Bahrain D D Bahrain 65 70 Negative
Current 65 Qualitative Assessment Neutral E=most risky; 100=most risky. Source: EIU, Markaz Research
Kuwait Financial Centre "Markaz"
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RESEARCH July 2012
5. Market Liquidity
After four years of continuous decline, liquidity levels saw an increase in 2011 and 2012. Value traded in GCC closed at USD 354bn in 2011, an increase of 19% over the previous year. 1H12 value traded came in at USD 371bn, a 91% YoY growth Value traded continued its uptrend in 2012 as well. 1H12 aggregate value traded came in at USD 371bn, almost double the 1H11 number of USD 194bn. The increase was led by Saudi Arabia, where value traded in the first half of 2012 grew 114% YoY to USD 332bn. Kuwait (13%) and UAE (18%) too saw notable increase in liquidity levels. Qatar and Oman saw 25% and 17% YoY drop in liquidity levels. Figure 6: Value Traded Trends (USD Bn) 1,617 1,371
Bahrain Qatar Kuwait Oman UAE Saudi Arabia
997 862 552 512 296 354 741
2004
2005
2006
2007
2008
2009
2010
2011
2012*
Note: 2012 value traded is annualizing of 1H12 value traded Source: Zawya, Markaz Research
Saudi Arabia's value traded in the first half grew 114% YoY to USD 332bn
Given the positive YoY growth in liquidity so far this year, we have a Positive view on the same for all the GCC markets except Qatar and Oman. Table 7: Market Liquidity (Value Traded)
Saudi Arabia CAGR (2001-2005) Growth - 2005 Growth - 2006 Growth - 2007 Growth - 2008 Growth - 2009 Growth - 2010 Growth - 2011 Growth 1H12 YoY 136% 133% 46% -58% -23% -36% -40% 44% 114% Kuwait 39% 86% -35% 103% 2% -43% -42% -50% 13% Positive UAE 214% 663% -9% 20% -3% -54% -58% -46% 18% Positive Qatar 118% 345% -29% 48% 61% -47% -28% 22% -25% Negative Oman 45% 85% -25% 86% 70% -33% -43% -24% -17% Negative Bahrain 51% 54% 116% -39% 120% -77% -39% -5% 56% Positive
Assessment Positive Source: Zawya, Markaz Research
Kuwait Financial Centre "Markaz"
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RESEARCH July 2012 C. Country Views
Saudi Arabia Positive We maintain a Positive outlook on Saudi Arabia for 2H12 due to increased economic factors and improving liquidty. Economic activity outlook is positive on most fronts like GDP growth, inflation, fiscal balance, current account balance and broad money growth. We also maintain a positive Earnings growth potential. Saudi Arabia was ranked 8th in the IMF's listing of world's 10 high growth economies of 2012. The IMF predicts Saudi Arabia's GDP to grow by 6% in 2012. According to data released by the Central Department of Statistics and Information (CDSI), Saudi economy grew by 5.94% in the first quarter of the year on YoY basis. This reaffirms the IMF prediction of 6% growth rate. Inflation in the Kingdom also seems to be moderating with June inflation at 4.9% - lowest level this year and the first time it dipped below 5% in the last 10 months. In January, Saudi Arabia annouced its 2012 budget with expenditure set at USD 184bn giving emphasis to social welfare, education and healthcare, although the government indicated that expenditure may slow going forward. Another significant development which cheered the market was the General Organization for Social Insurance's (GOSI) announcement of boosting investments in locally-listed firms which are currently valued at over USD 23bn. In April 2012, MSCI announced its decision to reintroduce MSCI Saudi Arabia Domestic Indices and also make changes to MSCI GCC Countries & MSCI Arabian Markets Index. News reports also indicated that MSCI could include Saudi Arabia to the Emerging Markets index if rules regarding foreign investor participation are relaxed. The Kingdom's first quarter corporate profits rose 15% YoY to USD 6.7bn. Profits were a good 28% higher on QoQ basis. Banks continued its steady performance with earnings increasing 23% YoY and 27% QoQ to USD 2.0bn. SABIC, which reported USD 1.9bn in 1Q profits, saw its bottom-line decline by 5% YoY due to softening of global petrochemical prices when compared to 1Q11. As previously mentioned, market liquidity is up in the Kingdom. Value Traded came in at USD 332bn for 1H12, a 114% YoY growth, which would translate to over USD 624bn if the pace keeps up to the end of the year. Kuwait Positive We have upgraded our outlook on Kuwait from Neutral to Positive for the remainder of 2012 due to positive economic factors, increased earnings growth potential and a pick up in market liquidity.
We have a Positive outlook on Saudi Arabia for 2012 due to increased economic activity
We have upgraded our outlook on Kuwait from Neutral to Positive for the remainder of 2012
Kuwait Financial Centre "Markaz"
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RESEARCH July 2012
The inflation is expected to come down to 3.5% in 2012 as compared to 4.7% in 2011. Fiscal Balance is expected to improve to 34.5% in 2012 as compared to 31% in 2011 & current account balance is forecasted to improve to 46.2% in 2012 as compared to 41.8% in 2011. Just like previous year fiscal and current account balances are expected to remain the highest in the Gulf. In March, World Bank warned that Kuwait Government spending patterns are unsustainable and said crude prices may fall 10%-15% by 2020, placing an enormous strain on Kuwait's fiscal budgets. During the first half, Kuwait Central Bank introduced new loan-to-deposit ratio (LTD) rules that will permit grouping of other sources of funding such as bonds and loans along with deposits to calculate LTD. This move was expected to increase interbank lending and aid in the development of financial markets. Kuwait earnings staged a comeback in the 1Q12 after three continuous quarters of de-growth. However, earnings dropped 25% over the year. The YoY drop (-25%) is mainly on account of a one-time gain of USD 959mn booked by Wataniya Telecom in 1Q11. Excluding the extraordinary item, aggregate profits grew 41% in 1Q12. UAE Abu Dhabi: Positive, Dubai: Neutral We have upgraded our outlook from Neutral to Positive for Abu Dhabi while maintaining a Neutral outlook on Dubai. Fiscal Balance for the UAE is forecasted to be 7.7% in 2012 as compared to 2.9% in 2011 which is a significant improvement. Similarly, Current Account Balance is forecasted to be 10.3% in 2012 as compared to an estimated 9.2% in 2011. The geopolitical and regulatory arenas are considered to be stable. Market liquidity has also shown improvement in 1H12. Value traded 1H12 was 12bn which is an 18% increase YoY. Our Neutral stance on Dubai, despite its attractive valuations, is because of problems with GREs which could deteriorate if market environment for fund raising becomes difficult. IMF had estimated GREs in the UAE to repay USD 30bn of maturing loans this year and face a "significant" amount of debt falling due in 2014 & 2015. In June, MSCI announced that MSCI UAE and MSCI Qatar Indices will continue as Frontier markets but will remain under review for potential reclassification at the next annual review in June 2013. In 1Q12, UAE corporate profits increased 8% YoY and more than doubled over 4Q11 to USD 3.1bn. Banking continued to dominate corporate profits with almost half of the country's earnings coming from that sector. While banking sector profits grew 66% QoQ, it declined 3% over the year to USD 1.6bn. Real Estate continued its recovery with USD 342mn in first quarter profits.
We have segregated our UAE outlook and are Positive on Abu Dhabi while being Neutral on Dubai
We downgrade Qatar from Positive to Neutral for the rest of 2012 owing to declined market liquidity and lower earnings growth potential
Kuwait Financial Centre "Markaz"
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RESEARCH July 2012
Qatar Neutral We downgrade Qatar from Positive to Neutral for the rest of 2012 owing to its declined market liquidity and lower earnings growth potential. Value Traded in 1H12 was 9.7bn which is a reduction of 25% YoY. Our earnings growth potential score is neutral because of volatile commodity prices and expectations of reduced lending growth. However, we are positive on other metrics like economic factors, valuation attractiveness, and geopolitical risk. Qatar projected USD 49.2bn of spending in FY 2012/13, a rise of 28% over the previous year. Based on an average oil price of USD 65/bl, revenue is seen increasing 27%. The budget projects a surplus of 8% of GDP. Qatar exchange launched 2 new indices from April: a total return index and a revised sector index. After a 28% earnings growth in FY2011, corporate profits in Qatar stabilized during the first quarter. Aggregate profits grew a measly 2% YoY while declining 12% over the quarter to USD 2.5bn. Qatar's 4Q11 profits were inflated due to a USD 463mn revaluation gain booked by United Development Co. If that effect is negated, then Qatar's earnings grew 5% QoQ. Oman Neutral We maintain our Neutral view on Oman. Although Oman is positive on economic factors and valuation attractiveness it scores a negative on earnings growth potential and market liquidity. Market liquidity continues to show a downward trend and in 1H12 the value traded was 1.3bn which was a decline of 17% on YoY basis. After a negative earnings growth in 2011, corporate earnings growth was flat in the first quarter of 2012. As mentioned earlier, we are however positive on economic factors. Oman is expected to grow by 5% in 2012, followed by 4% in 2013. Inflation is forecasted to come down to 3.2% in 2012, compared to 4% in 2011. We expect a robust government spend on infrastructure over the next few years. We expect robust government spending in Oman over the next few years In the 1Q12 Oman's corporate earnings was flat on YoY basis but increased 10% over the previous quarter to USD 380mn. Bahrain Neutral We maintain our Neutral view on Bahrain. Bahrain is positive on valuation and market liquidity. Value Traded was 0.21bn in 1H12 which is a growth of 56% on YoY basis. Bahrain scores a negative on earnings growth potential and geopolitical developments. Bahrain's corporate profits dropped 2% YoY in 1Q12 to USD 410mn. However, profits more than doubled on sequential basis. The sequential growth in profits was mainly due to large losses reported by Ithmaar Bank
Qatar has launched 2 new indices from April: a total return index and a revised sector index
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RESEARCH July 2012
(USD 66mn) and Bahrain Islamic Bank (USD 55mn) in 4Q11 due to increased last quarter provisioning.
The Final Analysis
Our outlook on Bahrain remains Neutral despite its valuation attractiveness Our view on market attractiveness is summarized in the table below. As per the five force framework assessment, we are Positive on Saudi Arabia, Kuwait and Abu Dhabi while remaining Neutral on all other markets for the rest of the year (Table 8). Table: 8 Final Ranking
Title Economic Factors Valuation Attraction Earnings Growth Potential Geopolitical Developments Market Liquidity Saudi Arabia Positive Neutral Positive Neutral Positive Kuwait Positive Positive Positive Neutral Positive UAE Positive Positive Neutral Positive Positive Abu Dhabi Dubai Positive Neutral Qatar Positive Positive Neutral Positive Oman Positive Positive Bahrain Neutral Positive
Negative Negative Neutral Negative
Negative Negative Positive
Overall Market View
Positive
Positive
Neutral
Neutral
Neutral
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RESEARCH July 2012 Appendix 1: Key Events During 2012
January (+1.6%6) Saudi Arabia's 2012 budget expenditure is set at USD 184bn with emphasis on social welfare, education and healthcare, although the government indicated that expenditures may slow going forward. Saudi Arabia's General Organization for Social Insurance (GOSI) announced intentions of boosting its investments in locally-listed firms, currently valued at over USD 23bn. Saudi's General Authority of Civil Aviation saw its first Sukuk, worth USD 4bn, oversubscribed by three times. The Kuwait Government announced plans to launch the low cost housing project company with a capital of KWD 100mn.
February (+7.4%) The Tadawul broke the 7,000 level for the first time since the global financial crisis struck, on optimism regarding economic growth and regulations that open the exchange to foreign investors. The UAE Securities & Commodities Authority (SCA) hoped to finalize new regulations concerning investment funds by mid-2012 UAE announced intentions of first sovereign bond, valued at USD 1bn at a rate of 1.2% Parliamentary elections in Kuwait, followed by resignation of the government with a new one to be formed before the end of February Qatar announced plans to build a USD 5.5bn petrochemical plant by 2018 in an effort to double the country's petrochemical production to 23mn tons from the existing 9mn tons.
March (+5.1%) Moody's warns that GCC banks could face a funding gap as European banks sharply deleverage their holdings in local banks. According to the agency, European bank lending to GCC banks totals approximately USD 237 bn. World Bank warns that Kuwait Government spending patterns are unsustainable. The Bank said crude prices may fall 10-15% by 2020, placing an enormous strain on fiscal budgets. Kuwait's 2012-2013 draft budget expected a deficit of USD 28.7bn, with a 13% rise in spending to USD 80bn. Aldar and Sorouh said they were in talks for a potential merger, with possible assistance from the government. Qatar announced launch of 2 new indices from April: a total return index and a revised sector index.
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April (-3.1%) IMF's World Economic Outlook predicted GCC economies are expected to grow by 5.3% in 2012 with current account balance of 25% of GDP and overall fiscal balance of 15% of GDP. Meanwhile, IIF estimated GCC growth to moderate from 6.9% last year to 4.9% in 2012, and a likely 4.2% in 2013 MSCI announced its decision to reintroduce MSCI Saudi Arabia Domestic Indices and also make changes to MSCI GCC Countries & MSCI Arabian Markets Index. Dubai Government launched a USD 1.25bn 2-tranche Sukuk, backed by real estate assets. Kuwait's National Assembly rejects draft bill on the KWD 30bn (USD 108bn) development plan as opposition accused the Government of failing to make progress on major investments that it provides for.
S&P GCC Composite
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RESEARCH July 2012
Moody's placed a Stable outlook on Qatar's banking system, reflecting strong macro environment and high public spending levels.
May (-6.4%) The IMF estimated Saudi Arabia to grow by 6% in 2012 with private sector increasing its role in the economy. IMF expects fiscal surplus at 17% of GDP and external surplus at 27% of GDP. Saudi Arabia announced plans to invest USD 53bn in air transport industry in the next five years. The Kingdom also launched a tender to build a new metro system in Riyadh IMF estimated GREs in the UAE to repay USD 30bn of maturing loans this year and face a "significant" amount of debt falling due in 2014 & 2015. S&P affirmed its 'AA/A-1+' long and short-term foreign and local currency ratings on Kuwait with Stable outlook. Kuwait Central Bank introduced new loan-to-deposit ratio (LTD) rules that will permit other sources of funding such as bonds and loans to be included while calculating LTD. Qatar projected USD 49.2bn of spending in FY 2012/13, a rise of 28% over the previous year. Based on an average oil price of USD 65/bl, revenue is seen increasing 27%. The budget projects a surplus of 8% of GDP.
June (-2.9%) MSCI announced that MSCI UAE and MSCI Qatar Indices will continue as Frontier markets but will remain under review for potential reclassification at the next annual review in June 2013. The UAE market regulator amended share ownership rules to ensure greater disclosure by investors. Investors will have to reveal all direct & indirect holdings in listed companies and inform the market if they intend to acquire 30% or more shares IMF article IV report on Kuwait expects economic growth to slow to 6.6% in 2012 from 8.25% in 2011, although they expect higher public spending and buoyant oil revenues to keep the economy growing. A consortium of Arabtec Holding that includes Greek and Turkish firms won a AED 10.8bn (USD 2.94bn) contract from the Abu Dhabi government to build a mid-field terminal at its airport.
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RESEARCH July 2012 Appendix 2: Markaz 5-Force Framework
1. Economic parameters Even though this is a very broad parameter to evaluate, we have taken in five criterions with weightings to evaluate the attractiveness of the economy. These five parameters are mostly forward looking and the estimates are arrived at by taking into consideration forecast data from International Monetary Fund (IMF) in corroboration with International Institute of Finance (IIF) and each country's central bank data. a. Forecasted Real GDP Growth b. Forecasted Inflation c. Forecasted Fiscal balance as % of GDP d. Forecasted Current account balance as % of GDP e. Historical broad money growth trend (M2) 2. Valuation attraction We have considered the levels of valuation on an historical basis to arrive at ascertaining the attractiveness of the markets. The valuation parameters used are: a. Price to Earnings b. Price to Book c. Dividend Yield 3. Earnings growth potential Earnings growth potential provides the forecasted earnings expectation for the year. We have arrived at these forecasts using a bottom up approach of aggregating earnings data for companies listed in GCC stock markets. 4. Geopolitical Developments Due to the changing nature of the geo political scenario in the region we have used the Political Stability Risk rating provided by Economic Intelligence Unit (EIU) to arrive at a score for geo political risk. 5. Market liquidity Due to the change in liquidity levels in the markets post the credit crisis, we have included this parameter to evaluate attractiveness in terms of liquidity. We have used value traded to ascertain the same.
We have taken in 5 criterions with weightings to evaluate the attractiveness of the economy
All the parameters are scored on a scale of 0-5, wherein 0 would mean the lowest score implying negative assessment and 5 would mean the highest implying positive assessment. .
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RESEARCH July 2012 Appendix 3: Economic Factors
Real GDP Growth Real GDP Growth (2000-2010 Avg) % Real GDP Growth (2011) % Real GDP Growth (2012 f) % Real GDP Growth (2013 f) % Source: IMF Saudi Arabia 3.5 6.8 6.0 4.1 Kuwait 5.0 8.2 6.6 1.8 UAE 6.1 4.9 2.3 2.8 Qatar 12.9 18.8 6.0 4.6 Oman 4.6 5.5 5.0 4.0 Bahrain 5.9 1.8 2.0 2.8
Inflation Inflation (2000-2010 Avg) annual change Inflation (2011) annual change Inflation (2012 f) annual change Inflation (2013 f) annual change Source: IMF
Saudi Arabia 2.4 5.0 4.8 4.4
Kuwait 3.4 4.7 3.5 4.0
UAE 5.1 0.9 1.5 1.7
Qatar 5.0 2.0 4.0 4.0
Oman 2.6 4.0 3.2 3.0
Bahrain 1.6 1.0 1.0 1.5
Fiscal Balance Fiscal Balance (2000-2010 Avg)-% to GDP Fiscal Balance (2011) -% to GDP Fiscal Balance (2012 f) - % to GDP Fiscal Balance (2013 f) - % to GDP Source: IMF
Saudi Arabia 11.1 15.2 16.6 10.1
Kuwait 28.2 31.0 34.5 31.8
UAE 5.1 2.9 7.7 7.0
Qatar 8.5 7.8 8.9 8.1
Oman 9.4 9.8 12.9 9.6
Bahrain 0.4 -2.3 -1.0 -1.7
Current Account Balance Current Account Balance (2000-2010 Avg) - % to GDP Current Account Balance (2011) - % to GDP Current Account Balance (2012 f) - % to GDP Current Account Balance (2013 f) - % to GDP Source: IMF
Saudi Arabia 16.5 24.4 27.9 22.7
Kuwait 30.3 41.8 46.2 41.9
UAE 8.1 9.2 10.3 10.4
Qatar 24.2 28.4 31.5 29.0
Oman 8.5 13.2 12.9 8.3
Bahrain 6.9 4.2 7.1 9.5
Broad Money Growth Average (1998-2002)-% change Average (2003-2010)-% Change 2011 1Q12 (YTD) Source: IIF, Central Banks
Saudi Arabia 7.5 13.5 13.3 3.8
Kuwait 4.9 12.8 8.5 4.3
UAE 12.4 20.5 5.0 7.4
Qatar 15.5 27.3 17.0 -2.1
Oman 6.7 15.8 12.2 3.7
Bahrain 10.1 15.4 1.7 3.3
RESEARCH July 2012
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RESEARCH July 2012
