Saturday, February 28, 2009

GCC markets 2009 – The Crown Jewel in Emerging Markets Equity Portfolio

The global recessionary fears have made portfolio managers worry over depleting asset value across investment classes, with equities getting hit the most. The “decoupling” theory did not work out for the markets so far, growth engines through BRIC economies is already discounted into prices more than what’s its all worth, commodity cycle is virtually over and US is into a mode of perpetual recession. What all this leaves behind to sophisticated portfolio managers who consistently seek alpha is one pertinent question – Where do I bet into and deliver those extra returns! – The answer is GCC equity markets!!

In our view, GCC equity markets, at its current status, offer the right investment asset class at the right price. This may surely sound odd to those who think that GCC story is all about Oil prices and with oil clearly heading to historical lows’, GCC assets are to be sold. This pessimistic view is what in our opinion is over priced into current asset values in GCC. So then, what else is left is GCC capital markets – Let’s investigate!!

The fundamental themes for GCC lie in its structural competitive advantages in sectors such as Petrochemicals (Middle East will likely replace the current global capacity by 2015), access to low cost feedstock, government investments into ancillary value chain ( partly reducing dependency on import / exports). We prefer playing fertilizer story in Saudi Arab Fertilizer Company (SAFCO) through Saudi Basic Industries (SABIC) and recommend Industries Qatar as a diversified oil and gas play into the region.

The cash rich end consumer market and widening clout of GCC based telecom companies (in our view, perhaps the best telecom asset class globally) – sustainable ROE, high Ebitda margins, and aspiring visionary management makes – Qatar based, Qatar Telecom (Qtel) and UAE based, Etisalat - two value picks, low risk alpha stocks into the GCC equity portfolio. The trouble days of GCC financial system is yet to get unearthed with write downs set to impact a handful of blue chip GCC banks.

We prefer Saudi banking system largely due to its well shielded regulatory policies, making it relatively insulated to foreign asset write down unlike its GCC peers and recommend - Samba Financial Group and Al Rahji Bank – a dividend play. We recommend investors to “Avoid” – Real Estate asset class – which include names like Emaar and Alder as we believe the market is yet to get the asset valuation right into this sector. Our view is that real estate would likely see more pain through 2H 2009, as banking system realigns its risk adjusted assets and alongside debt maturity concerns in many of these real estate counters.

We recommend a 40-30-30 portfolio asset weight to Saudi Arabia, UAE and Qatar respectively, with avoiding equities in Oman, Kuwait and Bahrain. However operating level exposure to these regions – Bahrain, Oman and Kuwait lie through subsidiary holdings.
Please contact us ( for the full report “GCC markets 2009 – The Crown Jewel in Emerging Markets Equity Portfolio”