Oil rally to bolster Gulf stock markets

Reuters/Ben Job

• Cash-rich companies in pole position
• Dubai index grows 21% in 2023
• Health and tourism on the up

A renewed oil price rally is boosting investor sentiment on regional bourses ahead of the final few months of 2023.

Listed Gulf companies with low borrowing and bountiful cash surpluses should outperform their more indebted rivals, asset managers have predicted.

Historically, the fourth quarter is often the best for Gulf equities, usually following a prolonged summer lull, with buying demand increasing ahead of full-year financial results and annual dividend pay-outs.

• Saudi Arabia to report fiscal deficits in 2023 and 2024 says IMF
• Investors snub Saudi’s lacklustre bank stocks
• Banks and property lead Dubai bourse to eight-year high

Gulf markets have experienced a mixed 2023. As of September 12, Dubai’s index was up 21.7 percent in 2023 and Saudi Arabia’s benchmark had gained 6.4 percent, but Qatar and Abu Dhabi had fallen 2.8 and 4.5 percent respectively.

“In terms of markets, last year’s underperformers are this year’s overperformers – Dubai has been playing catch-up,” said Ali El Adou, chief investment officer at Aditum in Dubai.

Fund managers highlighted how the performance of Gulf stock market indices masks a huge variance in their constituent stocks.

In Saudi Arabia the heavyweight sectors – energy, banks and materials – have struggled while some companies in other industries such as healthcare and tourism have doubled in price this year and many others have made gains of more than 35 percent.

“There’s a growing divergence between companies with positive and negative fundamentals – in many cases the weaker ones are getting worse and the stronger ones are getting better,” said Akber Khan, acting chief executive officer of Al Rayan Investment in Doha.

“We aim to identify medium to long-term trends and gain exposure accordingly. Thematically, there are numerous opportunities across the Gulf in healthcare, education, tourism and hospitality.

“Another is industrial companies that are exposed to government spending in the UAE and Saudi Arabia, particularly related to expanding hydrocarbon production.”

Avoiding heavy debt

In an era of rising interest rates, investors would be wise to target companies with large net cash positions that will benefit from the higher deposit rates while avoiding businesses with substantial borrowings and so burdened by the steadily increasing cost of debt, said Khan.

Similarly, El Adou’s focus is on companies with substantial free cashflows, reliable earnings, little debt and stable dividends.

“Higher-for-longer interest rates will negatively impact companies with high debt ratios,” said El Adou.

At an individual investor level, high interest rates also imply an opportunity cost to investors who put their money in stocks rather than savings.

“The asset management industry’s biggest competitor globally is the deposit rate,” said Khan.

“For about a decade that competitor was absent, but in the past 18 months it has returned with a vengeance and doesn’t look to be diminishing in stature anytime soon.”

Ibrahim Masood, senior director of equity portfolio management at Mashreq Capital in Dubai, said the US Federal Reserve’s interest rate strategy would shape regional banks’ net interest margins (NIMs) – a key indicator for profitability.

Banking, along with energy and petrochemicals, is the Gulf bourses’ most important sector.

“NIMs have peaked for this cycle and we expect they will remain stable or fall slightly – banks’ operating earnings growth next year won’t be as strong as 2023,” said Masood.

Oil the deciding factor

Should Brent crude prices remain within $70-$90 a barrel, they will have little impact on Gulf stock market sentiment, although prices above or below this range would bolster or diminish investor confidence, said Khan.

As of September 12, Brent crude was up about 27 percent since June 27, reaching a 10-month high of around $92 a barrel following a renewed price surge this week.

“Through to the end of the year, oil prices will be a positive factor for regional markets,” said El Adou.

Dubai real estate stocks have prospered as residential prices hit all-time highs.

“Rental prices are a good proxy of final demand and are strong for both the residential and commercial property,” said Masood.

Aditum’s El Adou believes Dubai’s stock rally can persist, although Abu Dhabi’s performance will depend on third-quarter results, especially those of newly listed companies.

“Abu Dhabi bank stocks look cheap compared with those in Dubai, he said. “Rather than a macro, top-down perspective, we’re very selective in terms of which we companies invest in although we do like the cyclical part of the economy.”

International investors are net buyers of Gulf stocks, but are still underweight compared with other regions, said Khan.

“The region was perceived historically as simply a source of capital and although it still is, it’s increasingly seen also as a source of investment returns and a place of significant opportunity,” he added.

“The UAE and Saudi in particular, and some other Gulf countries to a lesser extent, have comprehensive, large scale and focused government spending programmes that provide visibility for a number of years.

“The Gulf has far less uncertainty and far greater growth potential than many other regions.”

Broadly, emerging market investors have reduced their exposure to Chinese equities, with some of this money invested instead in Gulf stocks, boosting overall foreign ownership levels and foreign participation in regional share trading, added El Adou.