Dubai and Saudi markets likely to perform best in 2024

Reuters

• Top bourses in 2023
• Abu Dhabi rebound anticipated
• Mixed year for Gulf

Dubai and Saudi Arabia have been the top performers in a mixed year for Gulf stock markets and it is likely the duo will again outpace their regional rivals in 2024, analysts predict.

As of December 18, Dubai’s index had gained about 19.7 percent and Saudi Arabia was up 8 percent.

Yet Abu Dhabi – the Gulf’s top performer in 2022 – has lost 11 percent.

Qatar was down 7.5 percent and Kuwait’s premier market index had slipped 8 percent.

• Real estate trusts struggle despite strong Dubai market
• Foreign investment in Saudi capital market reaches $93bn
• Saudi exchange-traded fund to list in Hong Kong

“Financial markets don’t always neatly follow economic growth but in 2023 that’s what we’ve seen in the Gulf, with the bourses of the region’s two strongest non-oil economies – Saudi Arabia and Dubai – outperforming in terms of equities,” says Akber Khan, acting chief executive officer of Al Rayan Investment in Doha.

Shakeel Sarwar, head of asset management at Bahrain’s Sico investment bank, gives a similar view, highlighting how regulatory and social changes, along with the award of major international events to Saudi Arabia had boosted market sentiment.

In 2023 Sico has been overweight on Saudi’s domestic orientated sectors such as healthcare, insurance and consumer goods, which would also be largely unaffected should there be a long-touted global recession.

Higher trading volumes, new listings, economic diversification initiatives and a buoyant real estate sector helped Dubai’s index outperform in 2023, says Vijay Valecha, chief investment officer at Century Financial in Dubai.

Abu Dhabi’s bourse has suffered its worst year in a decade, according to Valecha, as shares in market heavyweight International Holding Co, which owns multiple companies, slid along with some of its myriad listed subsidiaries.

Yet Valecha predicts Abu Dhabi will rebound in 2024, partly as a result of its tie-ups with major bourses in Asia and the US, which should bolster cross-border listings and trading volumes.

Often, regional bourses rally in the fourth quarter as investor demand increases ahead of full-year earnings and dividend announcements. 

The war in Gaza has spurred a Gulf stock sell-off as risk-averse traders reduced their positions, but this is proving to be short-lived and it seems the conflict is ultimately having little impact on Gulf corporate performance.

Struggling sectors

Banks and petrochemical companies, which represent about two-thirds of the Gulf’s combined stock market capitalisation, have struggled this year.

Petrochemicals’ margins tumbled to two-decade lows and producers reported steep profit declines or net losses, while some banks have suffered following sustained interest rate hikes.

Normally, rate hikes expand banks’ net interest margins and so are beneficial to lenders, but high oil revenues spurred sovereign borrowers to repay loans.

That led to anaemic balance sheet growth for many, while some banks upped the rates they pay on savings accounts quicker than they repriced loans, because of the Gulf banking industry’s structure, Khan explains.

Consequently, for much of the year, net interest margins were lacklustre and banks also took higher provisions to protect against potential loan defaults by commercial and retail customers.

“If US interest rates start falling and we see a reverse of these trends, banks will certainly benefit as their costs fall more quickly and their borrowers will feel less stress from elevated borrowing costs,” says Khan.

“Petrochemicals will likely remain in the doldrums, though, and we don’t see much upside in the sector next year.”

US interest futures indicate traders expect the Federal Reserve’s benchmark rate to fall by about 1.25 percentage points by the end of 2024. It stands at 5.25 to 5.5 percent currently.

“As interest rates decline, many Gulf companies will benefit,” says Khan. “A combination of rising operating costs from higher inflation and greater borrowing costs has been especially difficult for companies that are highly indebted.

“As interest expenses decline, the bottom line should improve dramatically.”

In terms of sectors to target in 2024, Khan and Sarwar both highlight companies that will directly and indirectly benefit from ambitious plans by Saudi Arabia, Qatar and the UAE to expand hydrocarbon production.

“There’s a supply chain ecosystem that has and should continue to benefit from that,” says Khan.

Changing workforce

Greater gender equality and economic and social freedoms for women in Saudi Arabia is another major growth opportunity for Saudi companies, especially in consumer-focused areas, as more women enter the workforce, earn their own money and have greater spending power.

“This trend began before 2023 and will continue well beyond 2024,” says Khan. 

Saudi Arabia’s huge investments to expand its religious and nascent non-religious tourism industry will also boost earnings of many small and mid-cap stocks listed in the kingdom that serve the sector, says Khan.

“Saudi Arabia and the UAE’s continuous efforts to attract foreign capital and develop their economies should shape Gulf stock markets (in 2024),” adds Sarwar.

“Both countries are competing to attract capital, and this should help both in reforms and transformation.”