Credit Suisse upgrades UAE stocks

Volatile oil and Yemen crisis lead to another sharp sell-off in Gulf equities

Dubai — Credit Suisse said on Sunday that it is upgrading the UAE stock markets to overweight from neutral, citing the recent sell-off as “unjustified” while valuations are now at attractive discount levels.

Analysts at the global financial services group said a renewed weakness in oil prices since the beginning of March, followed by the recent military action in Yemen, has led to another sharp sell-off in Gulf equities, particularly the UAE, which has lost roughly 10 per cent month-to-date.

“This correction has largely removed the key overhang on the market and brought valuation multiples back to deep discount levels, while the earnings growth outlook remains robust. We expect the military strikes against Yemen to have a temporary impact on investor sentiment, with asset prices to recover within a matter of weeks. As a result, we upgrade our stance on the UAE to overweight from neutral previously,” they said.

The analysts said the concern about the impact of lower oil prices on the UAE’s economic growth was excessive.

Qatar’s bourse plans rights trading Dubai — Qatar’s stock exchange plans to allow investors to trade rights to share issues, which would let them profit from capital increases even without subscribing to them, the bourse said on Sunday. Rights allow their holder to subscribe to a share issue, usually at a fixed price that may be lower than the market price. To exercise rights, investors need to commit more money — but if rights are tradable, investors can simply sell them. The bourse gave no specific timeline for the reform but said it was working with regulators on the matter. Saudi Arabia’s bourse, the biggest market in the Gulf, already allows trades in rights. — Reuters

Credit Suisse argued that the UAE’s non-oil economy is a far more important driver for corporate earnings growth, as oil prices can cause nominal changes in gross domestic product, or GDP, which are not reflected in actual economic activity.

According to the Institute of International Finance (IIF), forecasts for non-oil GDP growth remain robust at 4.8 per cent for 2015, rising to 5.1 per cent in 2016. Similarly, the PMI data continue to average an impressive 58, with new orders averaging above 60. This is due to government spending, the key driver for the non-oil economy, being kept at elevated levels, a Credit Suisse report said.

“Since oil prices began their collapse in mid–2014, the Gulf region has lost substantial value and witnessed increased volatility. No market epitomised this trend more than Dubai, which tripled in value in the two years leading up to mid–2014 and lost about 40 per cent over the second half of 2014. Neighboring Abu Dhabi, meanwhile, close to doubled during the same time period, and its subsequent correction was a more modest 25 per cent,” they pointed out.

The report said the sell-off has pushed the 12-month forward P/E to 35 per cent discount to the MSCI World. Credit Suisse noted that investor sentiment has reached very subdued levels, with average daily value traded amounting to less than $100 million, a fraction of the $1 billion peak witnessed in mid–2014.

It argued that since too much negative sentiment is currently being priced in, the current scenario offers an important buying opportunity.

“This point is underscored by a bottoming out in medium-term momentum. The momentum had reached deeply oversold levels not seen since the financial crisis, but it had quite clearly troughed in mid-February. This suggests that the worst is behind us and the medium-term trend has now turned upward,” it said.

However, Credit Suisse cautioned investors that there are still downside risks in the short term. “This could come from a sharp fall in oil prices or global equities. As recent events have shown us, it can also come from geopolitical risk.”

— issacjohn@khaleejtimes.com