Welcome to Zawya Markets. 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.

1) What are the biggest risk factors both for MENA markets and global markets in the coming weeks?

Trade tariffs, political tensions around Iran that can cause a spike in oil prices and a possible turmoil in emerging market FX due to a rising US Dollar can be among the prominent risk factors for the region. The negative impact of trade tariffs has still not been fully discounted by the markets. Rising tariffs could lead to high inflation, forcing central banks to remove monetary accommodation earlier than expected.

2) What are your expectations for Q3 earnings in the region?

We expect earnings growth to be steady as government finances across the region have burgeoned due to increasing oil prices. This should allow the governments to adopt fiscally expansive policies that can boost the earnings of companies. Infrastructure building is continuing at a good pace and this should support the economy.

3) What is your view for UAE markets?

High energy prices and the introduction of new reforms are likely to propel the UAE GDP to grow by 3 percent in 2018 and this should improve the prospects of UAE stocks markets. The 50 billion dirhams stimulus announcement from Abu Dhabi’s Government, which amounts to nearly 6 percent of its GDP, can also drive the economy further upwards to an average growth of 2-3 percent for the next three years. We expect the UAE stock markets to rally by 2-5 percent in the coming months of 2018. DFM (Dubai Financial Market), with a dividend yield of 6 percent, and ADX (Abu Dhabi Securities Exchange) with 4.87 percent continue to be among the cheap markets in the world.

4) What is your view for the Saudi market?

Reforms undertaken by the Saudi Arabian Capital Market Authority (CMA) have helped it garner MSCI recognition as an Emerging Market and this is expected to drive further inflow of $45 billion into the Kingdom in the next few years. The reforms have certainly helped raise the investor awareness and profile, as well as aided in the global integration of Saudi Arabia, which has the seventh-biggest stock market among emerging nations. We expect the liquidity-driven rally in Saudi equities to continue.

5) What is your view for gold prices?

A good economy is something that Gold never likes and this is exactly what is happening now. US Dollar has got a fresh leg up after the upbeat US non-farm payrolls report where the data of 201,000 new jobs beat expectations of 191,000 and wages grew by 2.9 percent against a consensus forecast of 2.7 percent. US 10-year treasury yields have bumped up to 3.1 percent and they seem to be well on the way towards the 3.2 percent mark. Gold being a (non-?) interest bearing asset is likely to underperform in these circumstances.

6) What is your view for Kuwait’s stock market?

Boursa Kuwait Main Market Index is trading at attractive valuations of 11.24 forward PE (price-to-earnings) and 4.87 percent dividend yield, should attract huge international fund flows that seek to take advantage of a favourable MSCI review. Globally, it has been the experience that funds move ahead of the MSCI upgrade into the target market. Kuwait’s economy is in the midst of an unprecedented expansion and approximately $71.6 billion worth of projects are expected to be implemented in 2018-19, according to some estimates. All of this should spur interest in Kuwaiti equities.

7) Which sectors are expected to benefit the most from a potential upgrade of MSCI Kuwait from Frontier Markets to Emerging Markets status should it happen?

The banking sector and construction sector are likely to be the prominent beneficiaries of foreign fund inflows. Blue chip Kuwaiti companies like Commercial Bank of Kuwait and Ahli United Bank are trading at attractive valuations and they should be good in the medium term.

8) How much foreign inflows do you expect the Kuwaiti market will see if upgrades were to happen?

We expect Kuwait’s inclusion in indices like FTSE and MSCI to help drive additional foreign fund inflows to the tune of $2-3 billion within next two years.

9) If you were to pick one regional stock that you think will outperform over the next six months, which one would it be (and why)?

First Abu Dhabi Bank which formed in 2017 as result of merger is likely to benefit from economies of scale. It is also expected to gain from the ongoing consolidation among Abu Dhabi banks as well as the stimulus announced by the Abu Dhabi government. FAB is expected to show revenue growth of 15 percent in 2018 followed by 8 percent in 2019. Profits are expected to surge by 16 percent in 2018 and 11 percent in 2019. With a PE of 13.62 and a dividend yield of 4.83 percent, the stock has further room to run during the next six months.

10) If you were to pick a regional sector, which one would you pick and why?

The consolidation among UAE banks, especially the Abu Dhabi-focused banks, makes this sector a top pick in our view. Even from a layman’s perspective, we know that mergers will lead to fewer CEOs, headoffices and so on. In other words, a lot of duplication as well as flab will be eliminated and this will lead to fewer jobs. Consider this fact - there are approximately 50 banks in the UAE, serving a total population of 9 million. By all yardsticks, the UAE is heavily overbanked and it is in the interest of the economy to merge these entities so that the overall cost is reduced. For example, if there is a location where these three banks have their presence, then the number of branches can be reduced to one by a merger. This increases the overall efficiency and should be beneficial for all shareholders, thus boosting investor sentiment.

(Editing by Gerard Aoun and Michael Fahy)

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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