Economic indicators weaken outlook for GCC equities: Nomura

The economic indicators for Gulf Cooperation Council (GCC) states suggest a subdued outlook for the region, Nomura Asset Management said in a report on Tuesday.

The agency said the profit levels of the region’s listed companies remain broadly unchanged year-on-year (YoY), excluding the impact from Abu Dhabi National Energy Company (TAQA), which saw a sharp recovery after posting a loss of $4.7 billion last year.

The commodities (petrochemical) sector has seen a decent increase in profits, but this is offset by declines in domestic demand-related sectors. For Saudi Arabia’s Stock Exchange, improved liquidity since last year, ongoing fiscal rebalancing and the possibility of its inclusion in the MSCI EM index are positive indicators.

Profits in Saudi Arabia will rise by 1.9 percent YoY and in Kuwait by 8.2 percent. Earnings are expected to decline in Qatar (-6.5 percent), Bahrain (-5.8 percent) and Oman (-8.8 percent), the report said. The United Arab Emirates profits will be up 39.4 percent, largely due to TAQA.

 “With oil prices low, economic growth subdued, operating and interest costs rising and a consumption outlook clouded by the expected introduction of VAT, it’s difficult to be very bullish on regional equities,” Tarek Fadlallah, CEO of Nomura Asset Management (Middle East), said in the report.

Additionally, the uncertainties related to Qatar have hurt business confidence and have negatively impacted the “GCC brand,” he added.

 “While investor focus is on the large listed companies, much of the angst being expressed by deteriorating business sentiment is at unlisted private companies that form the backbone of the economy,” the report said.

The withdrawal of subsidies has also put pressure on profit margins, and the cheap expatriate labour is now beginning to get expensive, the agency noted.

According to Nomura, the performance of the regional stock markets has been disappointing in the context of the global rally.

“Valuations though have remained fairly well anchored, and in line with the subdued outlook for earnings,” the report said.