Welcome to the first Zawya Markets Weekly Q&A. Going forward, each Sunday we will be featuring an interview with a different analyst or markets expert from around the region.

If you would like to participate please email gerard.aoun@thomsonreuters.com.

Our first particpant is Nishit Lakhotia, head of research at SICO.

1) What is your view for oil prices?

We expect oil prices to average USD 70/bbl in 2018 and remain stable in 2019 as well.

2) To which markets do you expect to increase/decrease your equity allocation in the near future (3 months)

We remain bullish on Saudi Arabia, given the strength in earnings expected in the key banking and petrochemical sectors. Further, MSCI and FTSE driven fund flows will also support the market.

Similarly, Kuwait also should see strength as it gets included in FTSE Emerging index from September onwards.

Outside of these two, Dubai market can see some traction in high yield names as investors position themselves ahead of the dividend season.

3) What is your view for GCC markets?

We are overall bullish on GCC markets, given the strength in oil, improvement in international profile of the region post inclusion of Saudi Arabia and to some extent with Kuwait inclusion in the emerging index of reputable indices.

Higher government revenues will give flexibility in carrying out reforms and ability to push the economy through capital spending.

Also the fact that GCC markets have been underperforming over the past few years relative to other global markets and further the Dollar peg makes it an attractive market in terms of currency risks.

4) What is the biggest factor impacting the GCC stock markets at the moment?

Key themes are the FTSE, MSCI decisions for Saudi and Kuwait and rebalancing effects on other markets such as Qatar. Additionally, near term earnings growth will be a driver on some of these markets.

5) What is the biggest risk or threat in the coming weeks?

Any significant correction in oil price is a risk to sentiments. Further, if second quarter earnings disappoint.

6) Which sectors are expected to benefit the most from an upgrade of MSCI Kuwait from Frontier Markets to Emerging Markets status by index compiler MSCI in case it happens?

It will be the key companies that are expected to be included in the index as part of the upgrade. We are already seeing traction in blue chip stocks such as Zain and National Bank of Kuwait, from both FTSE inclusion and MSCI prospect.

7) How much foreign inflows do you expect the Kuwaiti market will see in case the upgrade happens?

The total passive flows could be in the range of USD 750-800mn from FTSE and MSCI flows can be 1.5 to 2x of this.

8) Can we compare the Kuwaiti upgrade to the Saudi market upgrade to EM?

Impact on Kuwaiti market in terms of size of flows to daily turnover should be more significant.

9) Will this upgrade have a positive or negative effect in terms of volumes on other Gulf stock markets? Could interest shift to Kuwait and lessen in other Gulf markets?

We have already seen foreign funds flow out of UAE to Kuwait and Saudi markets in first half of 2018.

Definitely near term realignments of flow can happen. Eventually positive and negative effect will depend on not just upgrade/inlcusion but also market valuations, disclosures and corporate governance, especially for active money which is much more significant than passive flows.

Nevertheless, inclusion of Saudi in particular with 2.5%+ weight implies that global emerging markets fund managers can no longer ignore this region and will need to reallocate and focus money in the coming years in the region.

10) What are your views for Q2 earnings so far across the region?

The results so far have been good and stronger than broader market estimates.

However, it is still early to conclude. We have seen strong numbers from Advanced Pharmaceutical Packaging Company, Riyad bank in Saudi while Emirates NBD and Dubai Islamic Bank have done very well in Dubai as of now.

(Editing by Gerard Aoun and Shane McGinley)

Any opinions expressed here are the author’s own.

If you would like to participate in the Zawya Markets Weekly Q&A please email gerard.aoun@thomsonreuters.com.

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