MENA equities end March in red as oil falls

markets ended March in red, as Brent crude fell 12%, and the geopolitical situation in the Middle East worsened. All markets were negative for the month, with Dubai (-9%), Kuwait Wt.ed (-6.7%), Qatar (-5.9%), and Saudi Arabia (-5.7%) lagging the most. The S&P GCC index closed the month at 115 points, registering a 6.9% drop in March.

Dubai Financial Market General Index (DFMGI) declined on the back of drop in oil price, and poor performance by industry heavyweights, such as Emaar Properties (-13%) and Arabtec Holding (-28%). While the dividend proposed by the former disappointed investors, the latter witnessed strong selling pressure due to lack luster profit numbers declared by the company. Kuwaiti weighted and price indices fell by 6.7% and 4.8%, respectively, due to concerns over the situation in Yemen1, and the fall in oil price. Saudi Arabia and its Gulf Arab allies began air strikes in Yemen, sparking fears of a bigger Middle East battle that could disrupt world crude supplies2. Despite this, oil prices declined in March over expectations of sanctions on Iran being lifted.

Both volume and value traded dropped across most MENA markets, especially in Qatar, Dubai and Morocco. While overall volumes fell by 9%, overall MENA market liquidity increased by 4.7%. In terms of valuation, P/E of Oman, Bahrain and UAE markets are lower at less than 11x. With the possibility of increase in supply from Iran, it remains to be seen if OPEC members will continue to hold firm with their present strategy. Markets in Morocco (16x), Saudi Arabia (16x), and Kuwait (15x), have relatively higher PE ratios. Saudi and Kuwait have the highest oil resources among GCC countries, and due to lack of economic diversification compared to their regional peers, continue to be the worst affected. Bahrain (1.0x), Kuwait (1.2x) and Jordan (1.3x) continue to remain undervalued in terms of P/B, while Morocco (2.3x), Saudi (2.1x), and Qatar (1.8x) are relatively overvalued. The political situation in Egypt is uncertain after the long-awaiting parliamentary polls have been indefinitely delayed in March, though preparations continue to take place.

Ooredoo recorded 89% QoQ reduction in net profit in the fourth quarter of 2014, compared to Q4 2013, despite a 12% increase in total subscriber base. This was primarily due to the company’s continuous strategic investment into its broadband networks, global brand rollout and customer acquisition costs. In addition, aggressive price competition in Iraq, and security situation in the country, along with start-up costs in Myanmar also impacted margins.

Blue chips had a negative month as nearly all ended the month in red. Zain (Kuwait) lagged among the blue chip stocks in the region, recording a decline of 18%, while Emirates Telecom posting a 4% increase. Ooredoo and SABIC were the other poor performers in March, registering a decrease of 13% and 12%, respectively. The former due to 89% slump in Q4 profit, and the latter due to falling oil price.

S&P 500 dropped 1.7% in March, due to strengthening dollar, increase in volatility, and mixed domestic data, in the backdrop of falling oil prices. While consumer confidence remained high, consumer spending continued to disappoint analyst expectations. The US dol- lar continued to climb against other major currencies, while the euro headed for its worst quarter on record, down around 11.3% since the beginning of the year.

European markets ended on a positive note, as deflation eased in March and unemployment rate dipped slightly, from 11.4% to 11.3%, in February. The total decline of 329,000 in the number of Eurozone jobless persons in the three months to February is the largest threemonth fall since the three months to April 20073. French and German markets closed the month at 1.7% and 5.0%, respectively, while the UK FTSE dropped by 2.5%.

Japan index registered a 2.2% increase, despite a central bank survey showing that businesses are wary about the economic outlook. The Nikkei index closed the quarter at 19,207 points up 10% from end of 2014. Shanghai Index also had a good month, rising 13.2%, even as manufacturing remained weak in February, and industrial employers shed more jobs.

Qatar’s Ministry of Finance formally announced that the fiscal year 2014/15 will be extended until the end of 2015, so that a new financial year could be followed from 2016. In its most recent fiscal year (2014/15), the government estimates a surplus of USD 37.6bn, which is an increase of 19% over the surplus recorded in the preceding year (2013/14), USD 31.6bn. Qatar has an estimated GDP growth of 6% in 2014 (USD 212bn4), led by strong performance in non-hydrocarbon sector, which is expected to grow at 12%. The 2014-15 budgetary estimates were based on oil price of USD 65 per barrel, but the average oil price (USD 99.45) in the 2014-15 fiscal that ended on March 31, was more than the assumed crude price. Hence, the present surplus estimates (USD 37.6bn) far exceed the initial estimates of USD 2bn. This surplus will be used to build QCB’s reserves, and to make available more capital for the Qatar Investment Authority.

The ministry has estimated revenues and expenditures for the remaining 9months of 2015, whose focus continues to be on developmental projects, specifically those related to FIFA 2022 World Cup. The fall in energy prices has not deterred the government from pushing ahead with projects in health, education, infrastructure and transportation. Even if the oil price falls below the level estimated in the budget, Qatar has enough reserves to cover any shortfall. In the recent inaugural credit rating from Fitch Ratings, the country was granted an “AA” rating with stable outlook, one of the highest investment grade levels, which shows the strength of Qatar’s financial position.

The government remains committed to the completion of its programs and projects outlined in the country’s National Development Strategy 2011-16 and to the various development pillars of Qatar National Vision 2030.

Despite the short surge due to the ongoing situation in Yemen, oil prices have declined in March by 12%. Despite the short surge due to the ongoing situation in Yemen, oil prices have declined in March over expectations of sanctions on Iran being lifted, which would result in increase in crude oil supply. Also, OPEC oil supply jumped to its highest in March as Iraq’s exports rebounded after bad weather, and Saudi Arabia pumped at close to a record rate.

Prices fell by close to 12% in March, as the deadline for the talks was reached at the end of the month. The deadline for the final agreement is on end of June, but US state department reported that talks with Iran would continue as enough progress has been made, and a deal could be struck soon. Iran has 10% of the world’s crude-oil reserves, but has seen its exports curtailed due to the imposed trade sanctions.

However, some analysts believe that even if a deal on Iran’s is reached, the impact on oil markets may not be immediate, as it is uncertain how quickly Iran can ramp up production.

Orascom Construction Limited (Egypt) was listed both in NASDAQ Dubai and Egypt exchanges in Mar’15. The company has started trading in the former on the March 9, 2015, and in the latter on the March 11, ‘15. Orascom Construction, the demerged unit of OCI N.V., offered 15.8mn shares, representing a 15% stake in the Cairo stock exchange. NASDAQ Dubai agreed with Egypt’s securities clearing house last year to promote cross- listings, while UAE investors will be able to clear their trades in Egyptian stocks via NASDAQ Dubai, reducing risk. As on end of month, the company had a combined market cap of USD 3.34bn.

Phoenix Power Company (Oman) has announced an initial public offering (IPO), which would occur by the summer of 2015. The company owns the under construction Sur independent power project (IPP), and plans to offer up a 35% stake in the company.