UAE equities to perform better in next 12 months
Bullish outlook is also supported by a more positive outlook on oil prices and stabilising earnings forecasts
A bullish real estate outlook, an impending tourism boom driven by new branded theme parks and a widely anticipated pick-up in business activity are critical triggers for the UAE equities to perform better over the next 12 months, a forecast by Credit Suisse said.
The bullish outlook is also supported by a more positive outlook on oil prices and stabilising earnings forecasts, Credit Suisse's ME research team said.
"We believe that the worst is behind us, while the next 12 months hold three important triggers for positive performance," the global financial services company said.
"First, we are bullish on the outlook for Dubai real estate and look for a modest recovery to begin in 2017, with acceleration in 2018-19. Second, we believe tourism will see a significant boost due to the launch of new attractions, in particular the major branded theme parks, which we believe should raise both the average duration of stay and the average daily spending by tourists. Third, we expect a boost to business activity and port volumes as preparations for the Expo 2020 pick up momentum," Credit Suisse analysts said.
However, as investor sentiment across the Gulf is somewhat muted it is difficult to pinpoint a near-term trigger, they said.
"While we are confident that several positive factors should lead to a meaningful improvement in the economic environment, as well as investor sentiment, the timing of this is uncertain. As a result, we recommend using current levels to accumulate exposure."
The research team said valuations are reasonably attractive, being in line with the long-term average.
"Technicals suggest the worst is behind us, but we believe it is too early to turn outright bullish. We recommend that investors stay selective. We are positive on the UAE, particularly Dubai, and Oman, and are cautiously optimistic on Kuwait. We see further downside risks to Saudi Arabia, Qatar and Bahrain," said the report.
The forecast said the upcoming third quarter results could trigger renewed buying interest, particularly if further evidence of consumer spending recovery seen and banking sector fundamentals will not deteriorate sharply.
"However, a return to the highs witnessed in 2014 could be further constrained by the significant pipeline of planned GCC sovereign bond issuances, for which we expect very strong appetite. We believe the scale of bond issuances could well divert liquidity away from equities and into fixed income."
According to the research team, the GCC region has been by far the worst performing globally and has not participated at all in the strong emerging market recovery over the past few months. "This is not so surprising given that oil prices remain well below levels needed for a fiscal budget breakeven and that subsidy reform has weighed significantly on growth."
Credit Suisse analysts observed two recent encouraging developments for the GCC bourses. Reported earnings which fell sharply over second half of 2014 and through 2015 as the collapse in oil prices fed through the real economy, have been stabilising and improving, driven in large part by a recovery in revenues.
Despite this marked improvement, they noted that downside risks to earnings still remain. One key area of uncertainty is the potential for further subsidy reform, which could weigh on both corporate profitability and consumer spending.
"Visibility on this is limited, but given the scale of announcements made thus far, particularly in Saudi Arabia, we believe the scope for a major announcement is less likely in the near term."
The next key reform is the implementation of VAT, which is currently targeted for 2018. Credit Suisse analysts also voiced relatively higher level of concerns over downside risks to banking sector earnings. Earnings growth slowed materially to one per cent year on year in second quarter 2016 (compared to 18 per cent at peak in second quarter 2014) as slower loan growth and higher provisioning took their toll, though this has thus far been offset by wider margins.
"We have yet to see non-performing loans increase. However, as we had stated previously, this is likely to be a trend we expect to emerge from second quarter 2016 results onward. Moreover, earnings downgrades in the banking sector have materially lagged the broader market," they said.
Another encouraging trend, according to Credit Suisse, is that Gulf equities have broken out of the downtrend that began when oil prices peaked in mid-2014. This is not yet an outright positive trigger, but it is an important milestone nevertheless and suggests that the worst is most likely behind us. Investor sentiment is still weak, as evidenced by weak trading activity Investor sentiment remains weak with trading activity averaging $1.5 billion daily across the GCC region, less than half the levels witnessed in first half of 2014 when oil prices were more supportive.