GCC markets end the year flat after a correction caused by oil price volatility, but 2015 looks promising for investors due to strong fundamentals and low valuations, a report said.

The performance of GCC markets was mixed in 2014, with the first nine months characterised by a steady uptrend, and the last three months witnessing extreme volatility, added the Markets Outlook Middle East & Africa markets bulletin:  January 2015 released by Abu Dhabi Investment Company (Invest AD),a leading financial services firm.

“A strong downward bias in the first two weeks of December, driven by an aggressive correction in global oil prices, erased the year’s gains before a sharp rebound brought some relief to investors,” said Sachin Mohindra, portfolio manager for Invest AD’s SICAV GCC Focus Fund.

“The recent market correction brought down valuations of a number of well managed companies to attractive levels, especially considering underlying earnings growth. This makes us optimistic about the prospects of GCC equity markets in 2015.

“Although the uncertainty around oil prices may affect sentiment in the immediate short term, we feel that the encouraging fundamentals of companies, coupled with continuing high liquidity in the markets, should drive markets higher over the next 12 months,” he added.

The upgrade of the UAE and Qatar to emerging market status has clearly put both the UAE and Qatar on the radar screen of a number of large actively managed emerging market funds, Mohindra said.

“We expect a gradual but decisive increase in interest from these investors in our markets. Whether or not this interest translates into investment flows in the short term would depend on absolute and relative valuations in 2015. The recent correction has brought valuations in line with other emerging markets, and certain companies look much more attractive compared to three months ago,” he said.

“Our current fundamental analysis work makes us bullish on companies which derive a significant part of their earnings from domestic demand in the GCC Countries. The recent correction has been brutal and has not differentiated between stocks based on company fundamentals. We therefore see value emerging in a number of companies across different sectors and countries.”

The GCC has made extremely creditable progress in economic diversification over several years, according to Mohindra.

“However, the upstream oil sector still accounts for a significant share of revenues and remains a key contributor to GDP. Consequently any prolonged weakness in global oil prices remains a key macro risk for the region. A slowdown in the implementation of infrastructure and other economic diversification projects is a related risk,” he said.

“Other macro risks for equity market investors are not specific to the GCC and include any higher-than expected slowdown in global growth, the pace and timing of interest rate hikes in the United States, the prospect of deflation in key economies such as Europe and Japan, and prolonged currency weakness in certain emerging markets.”

According to Mohindra, liquidity trends and investor sentiment are the key determinants of the IPO pipeline.

“Other factors that will influence IPOs are the growth plans of private businesses in the GCC and their financing needs. Regulators across the region have initiated measures to encourage privately owned businesses to consider listings. We believe that a number of these companies are evaluating an IPO. However, the actual timing will depend on prevailing valuation, liquidity and sentiment trends in 2015,” he said.

Equities

GCC markets have been dominated in recent weeks by movements in oil prices and other international developments, a trend that is set to persist in the short term, the report said.

Statements from Opec and other oil producing nations indicate they are focused on preserving market share and not yet willing to cut production, indicating further volatility ahead. Sentiment will also be influenced by the strength of the US dollar relative to emerging market currencies, growth indicators in Europe and Japan, and statements from the US Federal Reserve, according to Invest AD.

Regional markets experienced a sharp correction in early December on the back of sliding oil prices that was exacerbated by leverage-driven margin calls. In the weeks ahead any announcements relating to GCC government budgets for 2015 will be watched closely by investors.

The absolute levels and composition of capital spending in the new year, as well growth targets will provide some visibility on the prospects of a number of listed GCC firms.

The annual results of listed companies and any statements on their earnings guidance for 2015 will also be key determinants of medium-term market direction, the report said. – TradeArabia News Service