GCC equities may generate 10-15% returns in 2013: Sico
DUBAI — GCC equities are forecast to generate moderate returns in the range of 10 to 15 per cent in 2013 on the back of a steady improvement in overall fundamentals, multiple re-rating and earnings growth, a regional investment bank said.
In 2012, GCC markets performed well on a broad level, with two-thirds of the top 100 stocks ending with gains, while a sharper performance was seen from small-to-mid cap stocks.
“Large cap stocks, which had a subdued performance in 2012, are expected to outperform small cap stocks in 2013,” said the Bahrain-based Securities & Investment Company, or Sico, in its ‘GCC Equity Markets Outlook’ report.
Citing reasons why investors should invest in the GCC markets, the report mentions that the subsequent improvement in corporate earnings since 2009, when profits bottomed out, is not fully reflected in current market prices, leading to attractive valuations. With economic growth picking up, bond markets are expected to come under pressure, as monetary global policies slowly reverse direction, SICO said. Mark McFarland, chief investment strategist at Emirates NBD Wealth Management, stressing that investors should also look closely at alternative asset classes, said emerging market equities and commodities are preferred to US and European fixed income securities.
“Looking at world markets, we see investment opportunities in equities and commodities across the globe; including Mena, where we favour high dividend equities over fixed income,” said McFarland.
In 2012, the Dubai Financial Market, or DFM, rose 20 per cent year-on-year, and was the GCC’s best performing bourse last year, according to the Securities and Commodities Authority.
The Abu Dhabi Securities Exchange, or ADX, which rose 9.5 per cent last year, closely followed. Saudi Arabia’s bourse was up six per cent.
Sico report notes that the balance sheet growth of GCC banks continues to remain strong, driven by an improved regional economic environment that has benefitted from expansionary fiscal policies.
“The asset quality of banks is currently better than previous years, leading to lower provision charges and higher net profits. GCC banks are well-capitalised and have ample liquidity, and are thereby capable of meeting increased domestic lending needs, driven by higher government spending on infrastructure and industrial projects. The regional project pipeline remains strong at about $2 trillion, and has grown by nine per cent year-on-year, implying a backlog equivalent to twice the GCC’s total current GDP,” the report said.
“The regional telecommunications sector will remain fiercely competitive in 2013, with high penetration levels capping subscriber growth potential. Companies will focus on cost optimisation and redundancy measures to enhance margins and earnings; while merger and acquisition activities will continue,” Sico said.
In the petrochemicals sector, commodity chemicals prices will remain as volatile as 2012, depending on short-term supply and demand conditions, which contribute to oil price movements. According to the report, the overall outlook for the regional real estate sector is mixed, with performance varying by segment and country, the report said. However, the report highlights a number of concerns that could impact the growth of GCC equity markets in 2013. These include a renewal of social and political conflict in some non-GCC Arab countries is likely. Unemployment remains a key issue for the region, which has a fairly young population.
“This is increasing the need for structural reforms and diversification in the non-oil sector, creating incentives for future job creation and growth stimulation. Growing regulatory pressures on private sector companies to nationalise their workforces and implement fees on expatriate workers to decrease nationals’ unemployment, will have a negative short-to-medium-term impact on labour-intensive sectors,” it said.
Another concern is that regional economies are still significantly dependent on hydrocarbon revenues, making them vulnerable to changes in demand and pricing.
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