GCC countries to grow 5% on non-oil real GDP basis

Economies remain relatively buffered

KUWAIT CITY, Dec 24: As investors prepare for 2013, a new year it shall be, though the overall environment will be little changed. Realism dictates that, although a few things are different or improved here and there, we remain for the most part in a familiar environment. The economic growth numbers remain soft and vulnerable for the advanced economies, and the old risks are still with us; lessened perhaps, but still as hard to quantify or assess.

Greece remains in the headlines, though fears of its consequences have faded and its latest “bailout” package or payment is on the way. The EU continues to schedule almost monthly summits, where progress is made but at painstaking pace, most recently on banking union. Growth continues to hang tough in China where we seem to have avoided a hard landing, and where growth is expected to top 7.5% in 2013. The US is described as “better Furthermore, corporate earnings released so far reveal continued growth in earnings. The bourse’s return was supported by gains in the telecommunication sector increasing 3.3%, while the investment & financial dropping 2.26%. Total market capitalization gained 0.27% to AED 175.73 bn ($47.85 bn) from last month’s AED 175.26 bn ($47.72 bn). Liquidity plummeted during the month, volume and value decreased 33% and 28%, respectively, to 1.96 bn shares and AED 2.25 bn.

In Qatar, The Qatar Exchange declined as it was dragged down by institutional profit-booking to end a four-month gaining streak. The QE 20 Index shed 1.71% as the bourse’s YTD-12 return dropped further to a loss of 4.31%. Market performance was weighed down by declines in the heavyweight Banking and Industrial sectors which dropped 1.93% and 0.82%, respectively, to QAR 180.85 than the EU”, the latter being currently in recession and expected to post further negative or flat growth in 2013.

Whether one agrees with their actions or not, kudos have to go again to authorities, particularly central bankers, in the advanced economies for convincing investors, yet again, of their unyielding determination. Quantitative easing, QE or the massive purchase of assets in a zero rate environment, is expected to be the norm ahead in the US, Japan, UK and, under some form, in the EU as well. At its last meeting in December, the Federal Reserve went beyond its usual policy statement by communicating that: it is targeting a 6.5% unemployment rate (currently 7.7%); it did not expect to see such a level before 2015, and therefore would be stepping full blast on the QE/gas pedal, unless inflation threatens to rise above 2.5%, which is currently not foreseen by the Fed. That is another step up by the Fed and likely to encourage or soothe all the other central banks, currently restrained, by tradition or rules or the fear of new policies. FX rates seem driven or influenced by the notion that the major central billion and QAR 122.32 billion. Market capitalization for the month decreased 1.24% as all sectors except the Transport recorded declines. Liquidity registered a third month of steep declines as volume decreased 38% to 60.6 mn shares, while value traded decreased 21% to QAR 2.94 bn spread over 45,239 transactions. Negative sentiment dominated Qatar Exchange performance during the month with only 6 stocks out of 42 listed stocks witnessing marginal increase in share price led by Gulf Warehousing Co. with a monthly advance of 2.38%. Drop in heavy weight stocks pressured the benchmark to the downside with Qatar National Bank decreasing by 2.46% to close the month at QAR 130.6. QE return since the beginning of the year has not been reflecting the bright economic status and the healthy economic growth in the country along with strong corporate earnings and banks will follow the Fed’s lead. The general assessment that we share, again this year, is that the emerging markets/economies will outperform, and that their currencies and bonds will as well. The advanced economies ought to grow 1.5%, with a “flat” Europe and a near2.0% US, though the latter estimate ignores the risk of the fiscal cliff. The IMF expects Asia to grow 5.8%, the MENA region 3.6%, though again all these numbers presume no major crisis gets out of the hand in the year (EU/fiscal cliff/other).

Downside

The risks are, in 2013, primarily on the downside, especially before the fiscal cliff issues in the US are resolved (or postponed long enough). Recall that the fiscal cliff is a combination of tax hikes and spending cuts that automatically kick in on January 1-2, should the two political parties in the US fail to come to an agreement on how to reduce the current and future deficits, put US debt on a sustainable path, and in the process pass a new debt ceiling resolution. The last time we encountered the debt ceiling issue attractive valuation multiples.

In Bahrain, the All Share Index fell for the second consecutive month in Nov2012 pressured by the political uprising in the country with a monthly loss of 0.86% to close at 1,048.81 points and extended its YTD losses to 8.3%. Trading indicators increased during the month as the number of shares exchanging hands totalled 54.29 mn shares, an increase of 65% from the previous month; spread over 894 deals with a total value traded of BHD 5.3 mn. The market extended its decline to reach its lowest closing of 1,038.46 points on Nov 21, marking a fresh low since the beginning of the year.

Finally in Oman, the lack of local market catalysts coupled with on-going global disputes regarding the fiscal cliff and Greece’s financial stance negatively impacted investor risk appetite resulting in the MSM 30 Index to snap a three (and the possibility of a US delay/default), the country lost its AAA rating from one of the leading rating agencies.

Going over the cliff itself, i.e. if nothing is done on the matter by January 1, could subtract almost $600 billion from the US economy over a short period of time and guarantee a recession during the first half of 2013, if not longer. $600 billion is the average annual addition to GDP in the past 3 years. The hope is that some agreement, at least partial, on taxes and cuts, would reduce the hit to GDP from 4% ($600B) to something under 2%, which combined with the good news of a longer-term solution would prevent a recession.

In a context similar to the previous two years, we expect the GCC economies to remain relatively buffered and to continue to benefit from their very strong balance sheets that allow government spending on both workers benefits and on infrastructure spending. The GCC countries should grow about 5%, on a non-oil real GDP basis, and we expect oil prices to stay close to $100 pb, thus keeping these countries budget finances in surplus territory. month winning streak in November and end as the second worst performing market in the GCC region following TADAWUL and hence widen its YTD-12 losses to 2.83%. Accordingly, market breadth skewed towards the losers with an advancer-to-decliner ratio of 22-to-28 while 10 stocks remained unchanged. Liquidity decreased with volume falling 9.7% during the month to 195 mn shares compared to 216 mn in Oct-12, while value traded was down 6.6% to OMR 57.4 mn versus OMR 61.5 mn in the previous month. Market heavyweight banking & investment sector shed 1.65% of its market cap to reach OMR 3.06 bn, despite the 1.64% increase in heavyweight Bank Muscat to OMR 0.558; while the services & insurance sector slumped 1.7% to OMR 2.44 bn from OMR 2.48 bn and the industrial sector fell 2.9% to OMR 1.21 bn from OMR 1.25 bn.