DOHA: Strongly supported by Qatar and Saudi Arabia, Credit Suisse expects the Gulf region to post another year of solid gains on improving earnings momentum, strong investor sentiment and relatively attractive valuations in 2014.
In its research update on Gulf equities, Credit Suisse noted: “Our favoured markets remain Saudi Arabia and Qatar. We recommend a more stock selective approach to the UAE, and remain neutral on Kuwait and Oman on growth concerns.”
The Global Financial Services Company’s analysts sees a risk of momentum slowing down in H2 as the positive impact of UAE and Qatar entering the MSCI Emerging Market may be less anticipated. Labour market reform poses a near-term risk to Saudi Arabia.
On Qatar, the Credit Suisse noted the country’s yields are the key driver, not growth. Qatar offers the highest GDP growth rate in the region, and valuations and multiples are at a 20 percent discount to MSCI World. Despite this, we believe concerns related to the timing of the 2022 World Cup will be a headwind. Credit Suisse believes the market will be unwilling to pay for growth until significant world cup expenditure begins in 2015 onwards.
Valuation discount
In 2013, the Gulf market rallied 30 percent, outperforming the MSCI World. As a result, the region’s valuation discount has narrowed to 4.8 percent from 8.0 percent at the start of the year.
“We note that the Gulf trades at a sizeable 44 percent premium to emerging markets (EM). However, a direct comparison between the two is not appropriate, in our view. Recent work carried out by our strategists show that EM’s cheap valuation is driven, in large part, by its sector composition-in particular its significant exposure to the energy sector which is under-represented in the Gulf.”
Credit Suisse expects the Gulf market to record solid return in 2014, driven primarily by two supportive factors; rising earnings expectations and robust investor appetite. We expect the Gulf’s valuation discount versus the MSCI World to narrow further, with potential for a modest valuation premium to arise, while earnings upgrades, in aggregate, could continue at the current pace. As a result the Gulf region could generate returns of approximately 15 percent over the year.
By sector, we expect greater earnings revisions in petrochemicals than financials, as the former benefits from an improvement in the global macro environment. While fundamental continue to improve in the financials sector, much of the reduction in provisioning is now complete.
The Peninsula
