By Satish Kanady
DOHA: With more positive outlook on oil prices, technicals improving, and earnings forecasts stabilising, better performance are ahead for Gulf equities. A quick glance at the year-to-date performance by region shows that the Gulf Cooperation Council (GCC) region has been by far the worst performing globally. However, this year has seen earnings stabilising and improving — encouragingly, it has been driven in large part by a recovery in revenues, Credit Suisse noted yesterday.
The Qatari market has enjoyed a strong rally over the past 1–2 months, as FTSE changed its index construction rules resulting in a larger weight for key Qatari names in the index. Since then, the one-off impact has worn off and the market has consolidated. However, its valuation remains on the higher side while downgrades to earnings forecasts have lagged other GCC countries by quite a margin. In addition, the dividend yields which have historically been a key attraction for investors is the lowest in the GCC. Longer term, Credit Suisse analysts continue to have concerns about the outlook for LNG prices.
“With a substantial increase in LNG production facilities coming on stream in the US and Australia, we believe LNG prices should remain depressed for the foreseeable future. For now, we expect Qatar’s strong growth outlook to be supported by massive infrastructure development projects in preparation for the FIFA World Cup 2022. However, we believe this expenditure will strain Qatar’s finances as its revenue stream faces the risk of being under pressure for some time to come,” the analysts said.
Despite this marked improvement, the downside risks to GCC 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), Credit Suisse believes the scope for a major announcement is less likely in the near term. The next key re- form is the implementation of VAT, which is currently targeted for 2018.
There is a relatively higher level of concerns over down- side risks to banking sector earnings. Earnings growth slowed materially to 1 percent YoY in Q2 2016 (compared to 18 percent YoY at peak in Q2 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, this is likely to be a trend we expect to emerge from Q2 2016 results onward. Moreover, earnings downgrades in the banking sector have materially lagged the broader market,” they said.
Another encouraging trend 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.”
The Peninsula
