Strategy ideas in gulf equities and debt

The US Federal Reserve’s tapering of its quantitative easing programme will have a seismic impact on Gulf sovereign and credit markets.

Saudi Arabia’s TASI could well be the best performing GCC stock market index in 2014. While the deportation of illegal workers could hit Saudi retail/construction in the short run, the kingdom offers double digit twin surpluses, bank credit growth in the 13-15 per cent range and the most expansionary government budget relative to GDP since the boom era of 1970s. As global growth in the US, Europe, China and Japan rises, the Saudi petrochemicals could be a winner for 2014. Saudi petrochemicals have the potential for upside earnings, margin and volume growth surprises.

YANSAB, valued at 12 times forward earnings, a 10 per cent free cash flow yield and five per cent dividend yield, has the potential to be the best performing GCC petrochemical share in 2014. SABIC is its parent and a dividend hike is probable. SABIC is a value buy below SR100 and easily the Saudi blue chip in the sector with a dividend yield of five per cent, lowest feedstock costs and diversified exposure to global petrochemicals.

Dubai property prices have risen by 20 per cent in the past year, the ballast behind Emaar’s spectacular outperformance. As bank funding eases for developers, UAE GDP growth accelerates to 4 per cent and Arab Spring safe haven capital inflows continue with 100 per cent hotel occupancy rates, a huge number of project launches, strong growth in retail, Emaar remains the most attractive property share in the Gulf, particularly since it trades at a modest valuation metric just above book value.

Given the rise in dollar interest rates and slowing revenue growth, MENA telecoms have not shown bullish price momentum, apart from Saudi Telecom, with its restructuring potential and data traffic growth. Kuwait’s MTC Zain is the most attractive regional mobile telecom operator, thanks to its eight per cent dividend and “pure play” focus in Kuwait, Jordan, Saudi Arabia and Iraq now that it sold its African assets to Bharti.

Banks advantage

GCC banks were the winners in emerging markets in 2013, rising 25 per cent even as the Morgan Stanley emerging markets bank index fell six per cent. GCC banks obviously benefited from pegged currencies to the US dollar, even as emerging markets currencies from the Brazil Real, Turkish Lira, and Indian Rupee etc fell sharply against the greenback. I believe Saudi banks offer the best value and growth metrics in the region. SAMBA is the kingdom’s third largest bank after NCB and Al Rajhi. However, SAMBA (the former Citigroup affiliate in the kingdom) has the strongest liquidity position in Saudi Arabia, with its loan/deposit ratio of 73 per cent, SAMBA is the most liquid corporate and investment bank in the kingdom that is not expensive at 10 times earnings and 1.4 times price to book value.

Bank Muscat is Oman’s flagship bank, and dominates the Sultanate’s loan and deposit markets. Bank Muscat has been an underperformer in 2013 even relative to the Muscat Securities Market. However, it is now the GCC’s cheapest major bank at a mere 7.3 times earnings 0.9 times’ book value and a 4.3 per cent dividend yield. Yet Bank Muscat boasts net interest margins above 290 basis points, 13 per cent Tier One Bank capital and a 16 per cent capital adequacy ratio. As loan growth rises 14 per cent, EPS growth could rise 10 per cent. Bank Muscat is a deep value share.

The stronger economic growth in the US means the Bernanke (or Yellen) Fed will have to scale back its $85bn bond buying programme. The US central bank increased its balance sheet from $900bn after the failure of Lehman in 2008 to $4tn now to offset the steep fall in private bank credit growth.

However, after an epic rally in asset prices, the Fed has no choice but to taper. This event will have a seismic impact on Gulf sovereign and credit markets as the ten-year US Treasury note rises above three per cent.

At a time of rising dollar interest rates, it is best to buy only credits that have a very high yield to act as a shock absorber. This rules out Abu Dhabi bank and quasi – sovereign debt issuers, which trade at record low spreads over Uncle Sam debt due to their “safe haven” appeal. However, Qatari short term bonds could provide a cushion against duration risk. Qatar is a stellar sovereign credit and Qatari commercial banks are both liquid and buyers of local bonds on pullbacks.

I believe Dubai debt will be the worst performer in 2013 as higher US dollar interest rates means higher cost on its 2014 debt refinancing. Although banking system leverage has fallen since 2008, the IMF has warned about another property bubble. Refinancing risk will only rise in 2014.


Leave a Reply