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 is your view for MENA capital markets?
MENA is the focus of passive funds for 2018 and 2019, with some of the biggest index events in emerging markets happening in our part of the world this year (Qatar’s foreign ownership limit, Kuwait, and First Abu Dhabi Bank for 2018 and Saudi Arabia in 2019).

For active managers, we believe MENA capital markets are very interesting at this juncture, as they offer the opportunity to play various themes: a) if you want to go with the flow, you would look at Kuwait and Saudi Arabia, which have emerging market index inclusion stories and billions of dollars of inflows coming in, both have done well year to date; b) if you are looking for a mainstream emerging markets reform story, Egypt is the place to look at; and c) if you are a long-term investor, looking to buy deep value and benefit from high yields in the meantime, the UAE is the market to look at, with Dubai’s index trading at 7.5x earnings with a 6 percent dividend yield.

2) Are we seeing a correction in the Saudi market?
The Saudi market is one of the best performing markets year-to-date, especially if we look at large and mid-caps, a period of consolidation is expected, but we still believe the Tadawul Index could reach 10,000 by mid-2019, offering decent upside from current levels supported by banks’ EPS growth and index inclusion flows from FTSE and MSCI trackers, as well as fresh active GEM funds’ inflows accessing the Saudi market for the first time.

3) What are the biggest risk factors both for MENA markets and global markets in the coming weeks?
Oil prices are always in the background for MENA, small moves are unlikely to make much difference but big drops will likely lead to falling equity prices. In addition, we think a continuation of outflows from emerging markets would impact benchmark countries such as the UAE, Qatar, and Egypt.

Globally, trade wars and their potential impact on global growth remains the key concern. In addition, one should always keep an eye on U.S. rates and yields as higher yields could at some point reduce the appeal of equities, with treasury yields becoming more attractive than S&P500 dividend yield
recently for the first time in a while.

4) If you could make one change to how capital markets in the region are run, what do you think would have the biggest impact?
We think increasing foreign ownership limits (FOLs) to 49 percent in the case of the UAE for select names would go a long way in attracting fresh inflows into the market, particularly for Dubai Islamic Bank, Emirates NBD, DU, FAB, and ETISALAT, total inflows could be around $3-4 billion inflows (passive only), if these names move to 49 percent FOLs.

Eventually if the region moves to 100 percent FOLs, that would help further increase MENA’s weight within EM, which should be at least 6 percent vs 1.5 percent currently. In addition, we believe improving the market infrastructure by, for example, introducing centralised pools that can be used for securities lending, short-selling would help improve overall liquidity. Turnover ratios in the region could be much higher than they are today, and having the right products/infrastructure would go a long way to achieving that.

5) 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)?
We believe that Egypt food names are the best theme to play for 2018/2019. If I had to pick one stock it would be Juhayna. The company reported impressive 2Q18 results – we are encouraged by the pace of margin recovery in particular, which has so far been very solid and aided by cost rationalisation efforts in 2017.

6) What is your view for oil prices?
We think oil prices will continue to trade in the $70-80/bbl range for 2H18.

7) What are your views for Q2 earnings so far across the region?
Aggregate earnings so far are better than expected, however it is noticeable that the reaction to the earnings beat has been somewhat lacklustre in many markets including the UAE and Egypt where beats did not translate into strong price movement.

8) What impact would the Saudi Aramco buying a stake in SABIC have on the Saudi market overall, and the petrochemical sector specifically?
At the moment, we don’t think it will have a direct impact on the Saudi market, as it is one strategic investor replacing another. Impact on the overall market/petchems in Saudi is likely to be limited, if any.

9) 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?
Banks will be the main beneficiaries, but also Zain, Agility, and Mabanee. However, we believe an EM upgrade will also mean active managers take a closer look at the Kuwaiti market where stories like Humansoft, MEZZAN, and IHC look interesting even though technically they are small caps and will benefit from only minimal passive inflows.

10) Can we compare the Kuwaiti upgrade to the Saudi market upgrade to EM?
Even though the size of the Saudi upgrade is 5x that of Kuwait, the comparison is relevant, as these are the least owned markets in the region by foreign investors, and we think that will change post EM inclusion.

(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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