For a region often viewed homogenously there is significant variation in the equity market outlook across the UAE, Saudi Arabia, Kuwait and Qatar. Understanding the different fundamentals driving the considerable valuation variation between these four economies is essential to developing a nuanced equities approach to the region.
Despite a favourable petrochemical’s earnings outlook, substantial foreign exchange reserves and a favourable investment climate in Saudi Arabia, for example, high equity valuations present a dissuasive equities acquisition case. By contrast, the value profile of UAE equities, despite much more significant Covid-19 disruption, constitutes a far more compelling acquisition narrative. While significant government intervention has buoyed both current account and fiscal surpluses in Qatar, lacklustre PE and dividend yields present a weaker argument for equities. Kuwait’s ongoing dependence on oil earnings, political misalignment and, again, high equities valuation also demand an underweight equities strategy in this economically macro-challenged economy.
Like other Gulf Cooperation Council (GCC) countries, KSA enjoys large foreign exchange reserves with government debt below 30% of GDP. This presents the Saudi government an opportunity to implement some of the mega projects included in the Kingdom’s 2030 Vision to diversify the economy away from oil dependence. The recent announcement of the Shareek program is an example of the Saudi government’s delivery of this vision.
From an equity market perspective, despite the inclusion of Saudi Arabian stocks in the MSCI Emerging Markets index in 2019, international institutional investors remain relatively light on Saudi equities. Currently, domestic investors dominate equity flows, focussing on dividend yields rather than fundamentals.
While the Sahreek programme is expected to catalyse the larger bank and petrochemicals sector, banks are also expected to sustain mortgage loan growth, benefiting from the upcoming United States Federal Reserve rate hike. Petrochemical companies are expected to benefit from much better supply and demand dynamics as well as medium term growth in the hydrogen industry.
That said, with KSA’s high valuation multiples Amundi struggles to identify a fundamentally positive investment case. As such, Amundi is holding a moderate underweight position with a selective approach dominated by banks and consumer brands.
The UAE economy, and Dubai in particular, with its high exposure to tourism, leisure, real estate and construction, was disproportionately impacted by Covid-19 compared with its GCC neighbours. In 2021, however, global vaccine rollout is expected to transform these risk factors into cyclical tailwinds. As such, in 2021 the UAE should see a higher current account surplus than in 2020. The UAE should also benefit from the structural reforms initiated by the government as well as preparations for Expo 2020, now scheduled from October 2021 to March 2022.
In the medium-term, we anticipate further measures to address oversupply in the Dubai real estate sector. We also expect Abu Dhabi to benefit from the Abu Dhabi National Oil Company’s expansion plans aimed at increasing its oil production capacity.
Considering the value profile (next 12-months PE at a discount vs. MSCI Emerging Markets index) and an attractive 12-month forward dividend yield (>50% higher vs. MSCI Emerging Markets index) combined with the cyclical profile of the index composition, Amundi is currently holding an overweight position on the UAE, with a bias towards industrials and real estate brands.
Qatar proved relatively resilient during the Covid-19 crisis, almost balancing its fiscal position and current account in 2020. The economy was supported by a large fiscal stimulus of 10% of GDP, while local authorities invested close to USD 3 billion in the domestic equities market.
2021 is expected to see Qatar regain its twin surplus status, with both large current account as well as fiscal surpluses. The Qatari government is also expected to initiate another cycle of investment programs in preparation for the 2022 Football World Cup. The most important government project is Qatar’s liquid natural gas (LNG) expansion plan aimed at increasing LNG production 60% by 2027. This project alone will net benefit corporate and consumer segments. The end of the Qatar blockade (in place since 2017) should further improve economic performance.
Valuation wise, Qatar does not present particularly well both in terms of PE and dividend yield multiples. Consequently, from a global equity market perspective, Amundi maintains a moderate underweight position on Qatar with a preference for banks with solid balance sheets and resilient margins.
At the end of 2020 Kuwait celebrated its inclusion in the MSCI Emerging Markets index with a 0.5% weighting. 2020 also saw a smooth transition of power as Sheikh Nawaf Al Ahmed Al Sabah succeeded his half-brother as Emir.
With an oil sector accounting for 52% of GDP and continued OPEC+ supply cuts, prospects for recovery in Kuwait in 2021 remain muted.
Kuwait is also negatively impacted by the relationship between its government and parliament as well as the absence of fiscal consolidation measures. Contrary to most GCC countries, there is still no VAT in place in the country. As a result, Kuwait suffers from one the highest fiscal breakeven oil prices in the region.
This relatively challenged macroeconomic backdrop combined with high equities valuations inform Amundi’s retention of an underweighted stance on Kuwait. We do, however, have a selective approach to banks that could benefit from the recent mortgage law announcement.
© Opinion 2021
Any opinions expressed in this article are the author’s own
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