13 January 2010
Despite a major drop in earning in 2009 that was led by large provisions taken by the banking sector and drastic reduction in petrochemical and commodity prices especially during early 2009, the relative valuation of the Mena remains attractive, according to a new report by Audi Capital, titled, Mena Equity Strategy - 2010, Active Management to Dominate in 2010.

"Given the positive outlook for oil prices and the supportive expansionary fiscal and monetary policies, we expect earnings in 2010 to rebound by at least 25 per cent offering attractive investment opportunities, when markets react to reflect such strong fundamentals," said the report.

The report pointed out that last year the global turmoil took its toll on Mena markets. "Though the problem started in the US, Mena markets were severely affected by the global crisis, but did not fully join the recovery," it said.

As far as catching up with global recovery is concerned, the authors of the report said there were many obstacles the region faced when the problems came hitting its shores and led to massive erosion of wealth.

"Mena markets had witnessed severe losses with not a single market registering a full recovery," said the report, adding that this market "is not one single bloc. Fundamentals differentiate country performance".

Pointing out factors that had drastic repercussions on the economy, the authors of the report said: "Tight debt markets and restricted credit policies by the banks in the Mena region had resulted in major problems for corporations that wanted to revolve their maturing debt in 2009."

Citing the case of Saad and Algosaibi (major family conglomerate) in Saudi Arabia, they mention that default of major family conglomerates resulted in a major shock to the Saudi banking sector as well as all major banks in the region.

"Until today the case of Saad and Algosaibi has not been settled yet, nor the exact exposure has been determined."

The report also cites concern about the debt problems of government-related entities. However, they should be seen in proper perspective, it said, adding that "though the restructuring of the debt is a major concern for all investors in the region and should not be underestimated, the issue needs to be put in proper perspective".

Despite the problems that had plagued the regional market in the past year, Audi Capital said Mena fundamentals remain strong.

Mena is rich with large oil and gas reserves and the outlook for oil is positive. There are relatively aggressive GDP growth rates, relaxed fiscal policy, coupled with huge expenditures on infrastructure projects.

Even though there was a huge pullback in the size of projects last year, mainly in the UAE, which is attributed to the crash in real estate and as access to credit has been restricted in 2009, the huge spending happening in Saudi Arabia should offset that.

"Projects in KSA are still expanding in size where a major contribution comes from the plan championed by King Abdullah to build six new cities throughout the country.

"These cities together will have four times the geographical area of Hong Kong and an economic output equal to Singapore's."

Moreover, the countries in the region had enough cash to weather storms as during the last decade Mena has managed to accumulate huge amounts of foreign reserves.

"This provides Mena governments major cushion to manage any emerging crisis."

Citing examples of their ability to repay, the authors take the case of the UAE, which paid fully $4.1 billion (Dh15.06bn) of Nakheel in December. Moreover, Abu Dhabi provided a total of $20bn support to Dubai when needed.

In Qatar, QIA has participated in the capital increase of most Qatari banks when needed. "Qatar authorities bought the real estate portfolios and the domestic equity portfolios at favourable terms from commercial banks."

Regional sovereign funds have intervened several times in the stock markets.

KSA has spent a total of $130bn in 2009 and plans to spend a similar amount in 2010. Kuwait is also launching a $62bn plan in 2010.

Focusing on the Saudi economy, the authors of the report said the largest economy in the region will play a vital role this year.

"KSA is the largest economy in Mena region and most powerful player in the global oil market with a 22 per cent share of global oil reserves and 13 per cent share of global oil production.

"Oil is key driver for the economy, supported by the current positive outlook. Massive investment spending is underway - around $500bn between 2008-2012."

The country has ample room for counter-cyclical fiscal policies given the high level of fiscal reserves that were accumulated during the previous six years. This coupled, with prudent and conservative monetary policy and strong population growth reaching around three per cent with favourable demographics should make a positive impact in the country's economy.

Despite the worldwide credit crunch, the Saudi had a record budget in 2009 and then in 2010.

"Government is confirming its expansionary fiscal policy with massive investment on infrastructure and education," said the report.

"Undoubtedly, the huge figures in the budgets over the past two years, is evidence of the confidence the leadership has in the outcomes of the economy and its ability to accommodate more, despite the shrinkage being witnessed in the global economy," Dr Muhammad Al Jasser, Governor of Sama is quoted as saying in the report.

The government's commitment to continued spending had offset the drawbacks of the limited spending by the private sector.

"Fiscal spending on infrastructure projects had counterbalanced some of the pullback by the private sector spending. The total value of projects in KSA had not changed from 2008 to 2009 and many projects that were shelved in 2009 are coming back on the table in 2010."

Throwing light on country/sector performance in Mena, the report said despite a broad-based rally, some sectors and countries have lagged others, opening the door for the opportunity of catching up soon.

"Although Qatar recorded the largest GDP growth in 2009, Qatar underperformed KSA, Egypt, and UAE markets". And within Saudi Arabia "despite the massive government spending on infrastructure-related projects, the building and construction sector under-performed the peer sectors in the country".

And, in times of crises, correlations have increased and country diversification became less of an applicable concept.

However, when the turbulence lessens, investors will again target markets with solid fundamentals, said the report.

According to the authors of the report, factors to consider include level of economic activity, fiscal and monetary policy, level of public debt and regulatory changes.

On sector allocation, the report highlighted that building and construction will benefit due to massive government spending through expansionary fiscal policy.

"[This] will benefit all companies within this sector, especially after resolving the inventory problems in 2009."

Another sector to watch out for is banking. "Having survived several consecutive shocks of different types, the banking sector in the GCC region, mainly KSA and Qatar, is expected to rebound benefiting from improved macro-economic conditions and sufficient liquidity in the system, which will be translated into increased appetite for granting loans.

Also, lower provisioning charges on the loan book as well as on the investment book will act as positive catalysts for banks' earnings.

Shipping and logistics also figures in the list as demand for vessels, whether tankers or containers, is expected to increase as the global economy is moving towards a recovery.

The supply, on the other hand, is expected to decelerate for two main reasons - ageing fleet and restrictive regulations. Thus, the combined effect will result in an impressive surge in this sector, said authors of the report.

© Emirates Business 24/7 2010