GCC stock markets: What next?

It’s not all that scary, says OER columnist Matein Khalid, on the latest crash of the GCC stock markets

In retrospect, the global emerging market sell off echoes the earlier falls in the GCC markets. Egypt has become a casualty of the latest Wall Street grizzly jitters, as the most widely foreign owned Arab stock market. Market panics tend to be indiscriminate. Money managers often sell because they must; they sell what they can, not what they must.
This naturally means that large, liquidity bellwether shares often become victims of a foreign fund manager’s desperation to reduce country exposure or a margin call elsewhere in the region. Cross-national capital flows in the GCC have also led to a dramatic increase in pan-GCC coefficients of correlations, particularly on the downside.

Saudi Arabia: While the Saudi Tadawul index has risen to 12,000, valuations in the kingdom are still excessive. For example, it is absurd that Saudi banks still trade at six times book value and 25 times earnings, totally out of sync with bank share valuations metrics anywhere in the world. The one exception is Riyadh Bank, where a 2.6 per cent dividend yield offers some cushion. I also believe Saudi Telecom is overvalued at SR 112, even though it has fallen significantly from its SR 193 high. With a market cap of US$60 billion, Saudi Telecom sports a 18 price/earnings multiple though its yield at 4.7 per cent is treble that of the Saudi banks.

Kuwait: I am bullish on Kuwaiti banks at 12-14 times earnings, particularly NBK, which has a 30 per cent market share in loans and deposits in an oligopolistic, though extremely profitable, banking market. It is important to limit Kuwaiti exposure to liquid, first tier large caps such as NBK, Burgan Bank, Kuwait Finance House or the two telecoms (MTC, Wataniya).

Qatar: Qatar is still too speculative at its current value levels though I am bullish on Solidiere GDR at 22 as a play on Beirut property purchases to GCC investors. Q-Tel at QR 200 does offer a forward multiple of 10 and a natural monopoly as the Emirate is simply too small to interest a global telecom operator.

Oman: In Oman, BankMuscat is a reasonable proxy for the banking sector and an economy whose growth drivers are highly correlated to high oil prices.

Omani shares have reflected the bearish sentiment and declining turnover in the GCC, Arab and emerging markets stock exchanges, with the MSM almost 800 points below its 2006 high and now in the red YTD. Yet the fall in the Omani stock market has now been as traumatic as that of say, Qatar or Dubai, reflecting more realistic valuations and lower “irrational exuberance”, itself a function of leveraged speculation and bank credit growth.

This is a testament to the sophisticated market surveillance infrastructure of the MSM as well as the conservative monetary vigilance of the central bank, which understands the danger of liquidity driven asset bubbles all too well.

Of course, the MSM was collateral damage to the meltdown in the broader GCC and Arab equities markets. Capital flows from the GCC, particularly the UAE, recedes as investors scrambled to meet margin calls. Of course, as elsewhere in the AGCC, there is a disconnect between the stock market and the macroeconomic prospect of the Sultanate, with IMF projections of six percent GDP growth amid record high oil prices. This is the time to rotate into large cap, illiquid value shares in telecom, cement and banking, the ones favoured by pension funds and GCC fund managers. This necessarily suggests are overweight in BankMuscat, Rasyut Cement and Omantel. The margin call triggered selling panic is now over and the search for value cannot be far away.

UAE: The UAE stock markets are trapped in a listless trading range after the traumatic sell offs in March, punctuated by periodic speculative rallies such as that which caused the shares of Abu Dhabi Islamic Bank to double for no credible reasons. The technical deterioration in the Dubai Financial Market (DFM) means that support at 430 is critical or the market could well do a kamikaze dive to new lows. Volumes have, as usually happens in Gulf bear markets, plummeted on both the ADSM and DFM.

It is obvious that ostensibly lower valuations do not seem to attract institutional investors, even in liquid blue chips such as Emaar that has been unable to rise above 12 Dirhams on a sustainable basis. Higher interest rates, tangibly soft UAE property sale markets and ambiguities over margins on its global projects compounded with the inevitable selling pressure from trapped longs make it impossible to expect a sustainable rally in Emaar, the bellwether share that dominates the Dubai Financial Market.

The prospects for UAE banks are equally problematic. Valuations on most banks are excessive for a post-bubble world with rising interest rates in some of the most hyper competitive banking markets on earth. Even First Gulf and UNB, the cheapest Abu Dhabi banks, trade at two times book value. The IPO bonanza is over, hurting earnings growth. Q2 profit reports do not seem encouraging as banks were at the epicenter of the neutron bomb that fell on the stock markets, which have lost 60 per cent of their market cap
since October.

Banks usually learn the hard way that lending for share speculation usually has a nemesis in credit shock bombshell and rising provisions that restrain future profit growth. The existence of Emaar, the large cap listed banks and insurance companies mean that the UAE stock market is one of the most interest rate sensitive markets on the earth, akin to Hong Kong’s Hang Seng index.

So I seek shares without capital markets exposure or dubious and non-recurrent earnings, major liquidity risk, high beta to the index for UAE equities exposure. This leads naturally to Etisilat, which I would buy below AED 14 or a modest forward valuation multiple of 11. Its franchise ironically benefits from higher interest rates because Etisilat’s treasury routinely invests billions in excess cash in the money markets.

Etisilat has a solid balance sheet and, unlike Western telcos, no debt liabilities. Its EPS trends still promises 20 per cent growth, as its de facto UAE monopoly is still a cash cow. Pakistan will be a future growth engine and its Mobily subscriber adds make its Saudi Arabian venture a clear winner. I believe Etisilat is headed to AED 20.

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