|09 September, 2019

The road ahead for top MENA equities: What to expect in 2019

Emirates NBD's Marwan Haddad believes that the rally that took place in Saudi Arabia over the past 2 years will come to an end with the second tranche of the MSCI Emerging Markets Index inclusion

Image used for illustrative purpose. People attend a ceremony for listing of Nasdaq Dubai at Dubai Financial Market (DFM) in Dubai, UAE September 5, 2016.

Image used for illustrative purpose. People attend a ceremony for listing of Nasdaq Dubai at Dubai Financial Market (DFM) in Dubai, UAE September 5, 2016.

REUTERS/Celine Aswad

The outlook for regional bourses differs from market to market following a strong start in 2019 across the board. While the UAE stock markets offer attractive opportunities, the rally on Saudi’s Tadawul is expected to fade following the second tranche of the MSCI Emerging Markets Index inclusion.

The aggregate stock market index of the six Gulf Cooperation Council (GCC) countries along with Egypt rose 53.98 percent in the first eight months of the year.

However in August, the same aggregate stock market index dropped 1.81 percent, tracking a retreat in global markets and oil prices.

Stocks across the globe traded lower in August as trade tensions between the US and China as well as the uncertainty surrounding Brexit kept investors on edge.

“The uncertainty associated with the escalating trade war, Brexit and weak incoming data points from China and Europe will continue to impact risk-assets globally and across the GCC,” Marwan Haddad, senior portfolio Manager at Emirates NBD Asset Management told Zawya.

“However, the uncertainty has also underpinned more pervasive global monetary easing and allowed GCC central banks to also cut rates, which should provide some support,” Haddad said.

“Overall, the external outlook remains challenging but regionally performance is likely to diverge,’ he added.    

Sectorial analysis

While it might be difficult to determine the outcome of upcoming trade negotiations globally and how that might influence the global economic growth, Iyad Abu Hweij, managing director of Allied Investment Partners, said: “we can continue to expect more M&A transactions in maturing sectors in the region, and a focus on fundamental value for investors.”

“In terms of sectors, our focus is increasingly shifting towards non-cyclical sectors in the region. In a high volatility environment, looking at sectors with predictable returns such as Health Care, Utilities, Retail, and Consumer Staples will provide investors with solid returns,” he added.

“We have also seen the Banking sector perform positively in the region and we expect this trend to continue as more consolidation occurs in that sector. The Real Estate and Insurance sectors have performed particularly well in the UAE, with investors eyeing fundamental value in companies within both sectors,” Abu Hweij said.

 Markets outlook

The Saudi index has added 2.47 percent in the first eight months of 2019, driven by an inclusion in the MSCI and FTSE Emerging Markets Indices, attracting billions of dollars from foreign fund inflows.

Emirates NBD’s Marwan Haddad believes that the rally that took place in Saudi Arabia over the past 2 years will come to an end with the second tranche of the MSCI Emerging Markets Index inclusion.

Tadawul completed the second and final phase of joining the MSCI Emerging Markets Index at the end of August 2019, raising its weight on the index to 2.8 percent.

“We believe the upside potential is limited from this point, even though reforms and macro fundamentals are on the right track. However the country still needs 2-3 years for these reforms to start bearing fruit on the ground,” Haddad said.

“Thus the risk is more to the downside over the short term with expensive valuations, broader emerging market weakness and limited passive flows. Nevertheless, we are still able to find attractive investment opportunities in Saudi on a bottom up stock-specific basis,” he added.

Besides Saudi Arabia, equities in the UAE and Egypt offer attractive opportunities.

For the first eight months of 2019, Egypt’s blue-chip index EGX30 gained 13.81 percent. Emirates NBD’s Haddad said that the country is well positioned to attract inflows “as it embarks on the second leg of monetary easing and reporting growth rates of above +6 percent.”

Dubai’s index gained 9.05 percent from January to August 2019, while Abu Dhabi’s index rose 5.1 percent.

Charles-Henry Monchau, head of investment management at Dubai-based Al Mal Capital told Zawya that there is traction in Dubai, “mainly on attractive valuations and decent dividend plays.”

“For UAE Banks, repricing interest-bearing deposits at lower rates suggests a fall in the cost of funding, however, the higher cost of risk is slowing down profit growth,” he added.

Oman is one of the cheapest GCC markets and that the country’s “recent fiscal data is positive, despite worsening debt metrics,” Monchau said.

Muscat’s index dropped 7.31 percent during the eight months period.

Qatar’s market is “overly expensive in term of valuations with limited growth opportunities and under the mercy of passive flows, Haddad said.

“While Kuwait is also expensive and more importantly over-owned after MSCI announced in June 2019 its upgrade to MSCI Emerging Markets Index scheduled for June 2020,” Haddad added.

(Writing by Gerard Aoun, editing by Seban Scaria)

(gerard.aoun@refinitiv.com)

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© ZAWYA 2019

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