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Impact of oil drop on UAE 'muted'

Dubai - Country remains the most preferred equity market: BoA Merrill Lynch

The UAE remains the most preferred equity market in the Middle East and North Africa region, offering long-term growth prospects as the Arab world's second largest economy is likely to soft land this year, a forecast released on Thursday said.
Bank of America Merrill Lynch said with robust macro, attractive valuations, consistent earnings delivery and superior earnings growth, the UAE retains its position as the preferred Mena market and Kuwait as preferred GCC frontier market.
"As our most preferred attractively valued GCC market, the UAE offers long-term potential and healthy earnings momentum. The UAE is the only market with net earnings upgrades year-to-date, and our top picks are etisalat, Emaar and ADCB," said Hootan Yazhari, head of Mena & Frontier Markets Equity Research.
According to a report titled, 'Mena & Frontier Observer," released by the bank, the near-term direct impact of lower oil prices on UAE is more muted than for GCC peers.
"However, the indirect impact through lower regional and domestic liquidity, real estate, external sector and indebtedness would be more pronounced if oil prices remain low for long. In the near-term, we think Dubai should be able to tackle refinancing challenges," said the report.
BoA Merrill Lynch expects large Dubai projects to be gradually phased over time.
"We see strong Dubai government commitment to the timely completion of the Expo 2020. Disciplined fiscal policy remains paramount for Dubai government debt dynamics to take a stabilising sustainable path," said Jean-Michel Saliba, Mena Economist.
The report said the GCC shares look increasingly attractive after the broad-based sell-off since the summer. "Equity markets in the region presently represent a buying opportunity, particularly with appealing stock valuations and stronger earnings momentum."
"There are broad based buying opportunities, but stock selection is becoming key," said Yazhari. He pointed out that the sharp correction across frontier markets since the summer has also yielded strong opportunities across many other markets, including Saudi Arabia.
"In this context, we believe stock selection rather than market selection is becoming more crucial and advocate a focus on quality and mispriced opportunities", said Yazhari.
The report said in Saudi Arabia, opportunities have risen as the market is no longer expensive but we believe it's time to get selectively bullish. "Within Saudi, the consumer space presents an attractive long term opportunity, and we reiterate our Buy ratings on Al Hokair and Al Othaim."
The report said the GCC macro story is likely to have peaked if oil prices stay low for long. "Twin deficits are expected, as well as weaker real GDP growth and softer non-hydrocarbon sector growth on greater fiscal policy prudence."
A prolonged period of low oil prices and regional geopolitical threats remain the primary risks. The realisation of external risks and global risk aversion may cut market access to Dubai Inc, risking a credit event.
Jean-Michel Saliba said while in Saudi Arabia, we think wider deficits cushion growth, due to softer non-oil GDP growth, risks on the government capex pipeline, stable politics and unwavering oil policy, Qatar remains the most resilient GCC economy.
"We expect Qatari macro to continue outperforming GCC peers, as World Cup capex spending appears set to continue," the report said.
Qatar's fiscal and external breakeven oil price remains among the lowest in the GCC, at $66/bbl and $60bbl respectively.
"Regionally, stabilising oil market share increases downside risk to oil prices. Higher uncertainty may have a negative wealth effect and implications on business and consumer confidence, while lower marginal oil liquidity weakens money supply and private sector credit growth," said the report.
- issacjohn@khaleejtimes.com