GCC corporate earnings will take a hit in Q2 2020 as lockdown measures to stem the spread of the coronavirus hurt business activity during the quarter.

“Given the breadth and depth of the restrictions we saw in April and May, we expect GCC Q2 earnings to reflect the full impact of the lockdown,” Salah Shamma, Head of Investment, MENA, Franklin Templeton Emerging Markets Equity told Zawya.

“We anticipate most sectors to announce a material drop in quarterly earnings on the back of lower revenue and higher provisions,” Shamma said.

GCC net profits declined by more than 25 percent in Q1 2020. With companies given exemption to file quarterly earnings, many chose not to publish their results, KAMCO Invest said in a recent report.

The outlook for Q2 earnings does not look better than what we witnessed in the previous quarter, but few sectors could see earnings strengths.

“While banks’ earnings should be weak from lower margins, muted loan growth, higher credit costs in a COVID environment, volume and pricing weakness should negatively affect petrochemicals earnings,” Dipanjan Ray, Head of Research – Asset Management at Emirates NBD told Zawya.

“Similarly, most consumer cyclical sectors should see substantial weakness from lower footfalls and or volume,” Ray said.

However, a few defensive sectors such as consumer staples and telecom may see earnings strength, he said.

Saudi-UAE stocks/earnings

Stock markets in the UAE and Saudi Arabia dropped since the start of the year, as the pandemic and a retreat-in oil prices weighed on investor sentiment.

“We are optimistic on both the UAE and Saudi Arabia (stock markets), more so for the former than the latter given the potential risk/reward standpoint,” Ray said.

“Some strong UAE names have been disproportionately impacted by the COVID-19 situation, which is not warranted from a fundamental standpoint and is expected to be ripe for recovery when business prospects improve,” Ray added.

According to data from Refinitiv’s Eikon, Dubai’s index lost 24.56 percent since the start of 2020 (until Sunday’s closing) while Abu Dhabi’s index fell 14.97 percent. Saudi Arabia’s index fell 11.42 percent since the start of the year.

The UAE is expected to record earnings softness as the country’s “earnings are heavily dependent on banks, real estate, and telecom, and partly to transportation/logistics sectors, all of which with the exception of telecom are significantly impacted negatively,” Ray said.

“The Saudi market has proven resilient throughout the pandemic and continues to trade at a premium against its GCC peers,” Franklin Templeton’s Shamma said.

“Against its own history, the Saudi market doesn't look particularly expensive, however we do expect further downgrades to earnings forecasts during the year,” he added.

Earnings recovery in Q3?

GCC corporate earnings are likely to improve in the coming quarters thanks to the easing of lockdown measures in many states.

Emirates NBD’s Ray expects some sequential earnings improvement from the third quarter onwards indicating that the region probably has gone past the worst.

According to Franklin Templeton’s Shamma, “earnings should recover in the quarters to come as GCC governments ease restrictions and open up their economies.”

GCC countries are emerging from the lockdown and are gradually lifting restrictions implemented to stem the spread of the coronavirus.

“Defensive sectors such as consumer staples, education and healthcare will likely normalize faster than other sectors, like consumer discretionary and hospitality, where the impact of COVID-19 and fiscal austerity measures could be more prolonged,” Shamma said.

(Reporting by Gerard Aoun; editing by Seban Scaria)



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