Regional Equity Strategy

Equity markets in the GCC remain buoyant as we head into the final months of 2013, with the S&P GCC index recording gains of 17.1% since the start of the year. Our core view has long been that a combination of rising liquidity, elevated consumer and business confidence, fiscal stimuli, loose credit conditions, and healthy growth within the non-hydrocarbon private sectors of the GCC are set to underpin continued advances in equities across the region. We retain our constructive outlook on Saudi, Omani, Qatari, and UAE equities, with a preference for Dubai's DFMGI over Abu Dhabi's ADX.

That said, we note that gains are likely to be harder to come by over 2014 after the heavy advances seen in several markets this year, with valuations now back to multi-year highs. For instance, the Bloomberg GCC200 Index, which groups together the top 200 equities in the region based on market capitalisation and liquidity, now has a price-to-book value of 1.75, compared to 1.64 for the MSCI Emerging Markets Index (although the Dubai Financial Markets General Index, the region's best performer this year, still has a P/B ratio of only 1.16). Moreover, we expect headline real GDP growth in the GCC region to slow slightly next year, averaging 3.7% compared to an estimated 4.1% in 2013 (see 'GCC: Key Themes For 2014', October 11).

In that light, regulatory changes and attempts to improve liquidity will act as important catalysts for further upside over the coming quarters. Kuwaiti officials have recently mooted plans to launch derivatives trading in the first half of 2014. Qatar and Oman have plans for a series of initial public offerings (IPOs), with the Omani government set to offer a 19% stake in Omantel, the country's incumbent operator (see 'Privatisation A Long-Term Imperative', September 27). The Qatar Exchange submitted proposals to the government on October 29 for higher limits on foreign ownership of listed stocks, in a bid to attract liquidity and encourage more IPOs going forward.

Growth Rates To Slow Slightly
GCC - Real GDP Growth, % (Brackets Refer To GCC Average)

Regional Equity Strategy

Equity markets in the GCC remain buoyant as we head into the final months of 2013, with the S&P GCC index recording gains of 17.1% since the start of the year. Our core view has long been that a combination of rising liquidity, elevated consumer and business confidence, fiscal stimuli, loose credit conditions, and healthy growth within the non-hydrocarbon private sectors of the GCC are set to underpin continued advances in equities across the region. We retain our constructive outlook on Saudi, Omani, Qatari, and UAE equities, with a preference for Dubai's DFMGI over Abu Dhabi's ADX.

That said, we note that gains are likely to be harder to come by over 2014 after the heavy advances seen in several markets this year, with valuations now back to multi-year highs. For instance, the Bloomberg GCC200 Index, which groups together the top 200 equities in the region based on market capitalisation and liquidity, now has a price-to-book value of 1.75, compared to 1.64 for the MSCI Emerging Markets Index (although the Dubai Financial Markets General Index, the region's best performer this year, still has a P/B ratio of only 1.16). Moreover, we expect headline real GDP growth in the GCC region to slow slightly next year, averaging 3.7% compared to an estimated 4.1% in 2013 (see 'GCC: Key Themes For 2014', October 11).

Growth Rates To Slow Slightly
GCC - Real GDP Growth, % (Brackets Refer To GCC Average)

In that light, regulatory changes and attempts to improve liquidity will act as important catalysts for further upside over the coming quarters. Kuwaiti officials have recently mooted plans to launch derivatives trading in the first half of 2014. Qatar and Oman have plans for a series of initial public offerings (IPOs), with the Omani government set to offer a 19% stake in Omantel, the country's incumbent operator (see 'Privatisation A Long-Term Imperative', September 27). The Qatar Exchange submitted proposals to the government on October 29 for higher limits on foreign ownership of listed stocks, in a bid to attract liquidity and encourage more IPOs going forward.

Expectations have steadily grown for Saudi Arabia's stock exchange, the Tadawul All Share Index (TASI) to be opened up to foreign direct investment, with the authorities having passed a series of recent reforms aimed at improving the country's investment climate. We caution, however, that any market opening would likely be narrow and gradual (see 'What Will The Opening Of The TASI Look Like?', September 24). In the UAE, the proposed merger of the Abu Dhabi and Dubai Stock Exchanges would bode well for the country if realised, and give further credence to its position as the financial centre of the Middle East (see 'Proposed Bourse Merger A Positive Development', October 3). Both the UAE and Qatar will benefit from their entry in the MSCI Emerging Markets Index in May 2014 (see 'Assessing The Impact Of The MSCI Review', June 6).

Foreign Interest Rising
Saudi Arabia - Tadawul All Share Index

The TASI closed at 8,043 on October 31, up by 17.7% since we entered our bullish long-term view into our MENA regional asset strategy in July 2012. With third-quarter earnings across several sectors (including retail) having fallen moderately short of estimates, the index could struggle to break through resistance of 8,250 over the near term. That said, the macroeconomic backdrop remains strong: leading indicators of economic activity point to continued buoyancy in private consumption, and we forecast real GDP growth of 4.3% for 2014 (see 'Healthy Outlook For 2014', October 29). Combined with the business environment reforms underway in the country, the TASI remains one of the most attractive propositions in the region, in our view.

Still Further To Go
Dubai - Dubai Financial Markets General Index

We also remain bullish on UAE equities, with gains to-date for the Dubai Financial Markets General Index (DFMGI) and Abu Dhabi Securities General Market Index (ADX) of 68.4% and 39.0% respectively. We expect economic activity in the UAE to remain robust over the coming quarters, with a host of leading indicator data continuing to show consumption and investment patterns holding up well throughout 2013. We target gains up to 3,100 over the medium term for the DFMGI and expect the ADX to reach 4,000 in the coming months, up from levels of 2,922 and 3,845 respectively at the time of writing.

Two factors have underpinned recent gains for the DFMGI in particular. One is the impressive recovery of the real estate market: the housing component of the consumer price inflation index in Dubai recently reached its highest level since 2009, with property firm Asteco reporting that average apartment rents in Dubai rose by 20% y-o-y in Q213. Emaar, Dubai's biggest publicly traded real-estate developer (accounting for 20% of the DFMGI), reported higher-than-expected Q313 profit. Secondly, expectations are widespread that Dubai will win its bid to host the World Expo 2020, with the results set to be announced on November 27. While a successful bid would undoubtedly provide further stimulus to construction and economic activity, we caution that investors appear to have prematurely priced in a positive scenario, which could trigger a sell-off in the event of another city securing the Expo.

Benefiting From Solid Support
Qatar - Qatar Exchange

The Qatar Exchange (QE) closed at 9,837 on October 30, with gains of 10.1% since we turned bullish on May 15. The index continues to benefit from long-term support at the 9,100 threshold, and we target a rebound to resistance of 10,000 in the near term. However, we note that a break above that level could require an additional catalyst, perhaps through the completion of one of the planned IPOs (which cover a unit of Qatar Petroleum and Doha Global Investment, a US$12bn fund) or the raising of foreign ownership limits for existing listed firms.

BMI MENA EQUITY STRATEGY
Entry Date Entry Level Gain/(Loss) Rationale
Bullish Dubai DFMGI 15-Jan-2013 1735 68.42% Relatively healthy economic backdrop, surging business and consumer sentiment, and bullish technical outlook.
Bullish Saudi Tadawul 05-Jul-2012 6,834 17.70% Heavy government spending and passing of long-awaited mortgage law bode well for consumer-driven and banking stocks.
Bullish Qatar QE 15-May-2013 8,938 10.06% Liquidity will remain on an upward trend as a result of June 2013 MSCI upgrade and upcoming IPOs. Solid fundamentals.
Source: BMI, Bloomberg
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