Global Investment House – <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Kuwait – GCC Market Review – March 2007
– GCC stock markets witnessed sell-off in the month of Mar-07 as the investors rushed to book profits. Strong selling pressure led to four markets recording a steep monthly declines. Only Kuwait (+6.3%) and Bahrain (+1.1%) managed to end the month in the postive territory. Now, at the end of 1Q-2007, only Kuwait market index is the only one in the region to report YTD gain of 8.4%.
<?xml:namespace prefix = v ns = "urn:schemas-microsoft-com:vml" /><?xml:namespace prefix = w ns = "urn:schemas-microsoft-com:office:word" />Saudi Arabia, which had witnessed strong buying activity in the previous month, witnessed selling pressure in March, amidst high volatility with the index ending the month below the psychological 8000-point barrier at 7,666.1 points. However, the biggest sell-off was registered in UAE markets where the representative NBAD Index registered a monthly decline of 8.9% in Mar-07. It seems that the investors have been acting cautious, ready to book profits at every upturn in the markets. Also, we may expect to see another strong round of trading activity next month as the corporate earnings of 1Q-2007 start trickling in.
Table 01: Index Performances
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Country |
Source: Respective Stock Exchanges and Global Research
Corporate earnings – modest growth despite tough market conditions…..
The regional corporate earnings of 475 listed companies (which reported profits at the time of this report) exhibited a modest growth during the year of 9.33%. The aggregate earnings growth was significantly lower as compared to 61.4% growth recorded in 2005. Strong economic fundamentals and growing business confidence underpinned modest growth in earnings, despite the volatility and correction in the regional capital markets. Sectoral profitability reveals an interesting trend, with 5 sectors reporting yearly earnings growth while other 5 sectors reported de-growth in earnings.
Banking sector achieved a growth of 22.4% during the year 2006. The banks showed improved performance in core earnings on the back of adequate liquidity in the system and benign interest rate environment. The thrust towards increasing the contribution of non-oil revenue base coupled with major infrastructure projects, resulted in a further fillip to core banking activities. Investment gains and capital market related income declined on account of the correction in the regional markets. Also banks are diversifying geographically, as National Bank of Kuwait (NBK) will start operations in Saudi Arabia and UAE. Also consolidated activity which has started with the merger between Emirates Bank International (EBIL) and National Bank of Dubai (NBD) would create the largest bank by assets in the UAE, and would be the third largest in the region.
Table 02: GCC Sector Profits - 2006 (US$mn)
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Sector |
Source: Global Research
The investment companies were impacted by the downfall seen in the regional capital markets during the year 2006. Most of the companies under the investment sector reported a negative earnings growth in 2006. The investment companies reported a decline of 24.5% in earnings growth for the year 2006. We believe that corporate earnings is likely to get a further fillip on the back of increased consumption, spending and investment avenues in 2007. Insurance sector also reported a negative growth of 37.7% in the year 2006, as insurance companies in the region have majority of their investments in equity, which have resulted in marked to market losses in 2006. However, in terms of core business, the insurance companies have been able to increase their penetration in the market with the growing awareness and importance of insurance.
Real Estate sector reported the highest drop of 65.2% in earnings growth in the year 2006. Going forward, the real estate companies will benefit from the infrastructural developments and regulatory reforms around the region. In addition, the growing expatriates in the region will also increase the demand for rental properties as many countries have opened up real estate sector to expatriates. Telecom sector on the other hand achieved growth of 30.0% in 2006. The telecom penetration rates have increased dramatically in the last year or so. Going forward, we believe the telecom sector will continue to grow at above-average growth rate and mainly due to the expansion of regional operators outside the GCC countries. Going forward, we believe that the regional economies are still growing strong on the back of higher oil prices and with the governments using the massive liquidity to stimulate growth and launch streams of development projects, it will further trickle down to improve corporate earnings across the region.
Ras Al Khaimah – well on path of diversifying its economy…
Ras Al Khaimah (RAK), which occupies an area of 1,684 sq km is the fourth largest of the seven Emirates in UAE. RAK was the last Emirate to join UAE in 1972, post formal establishment of the latter as a combination of six Emirates in the previous year. The Emirate has a population of about 198,000, which forms a small part of the population of around 4.7mn in UAE. RAK occupies a strategic location in the heart of the Middle East on the Strait of Hormuz. RAK’s economy is unique in that it has minimal dependence on oil, unlike some of the other Emirates in UAE and most of the other countries in the region. Thanks to the run-off water from the HajarMountains, RAK has an abundance of flora. It is, therefore, no surprise that agriculture plays an important role in the Emirate’s economy. The fertile, cultivable planes are productively used for vegetables, fruits and grains, while milk and cheese farming is also common in the Emirate. Fishing is plentiful in the rich waters of the Arabian Gulf. The Emirate is also picturesque and has moderate climate in winter, giving an opportunity for it to be marketed as a tourist location. Further, the mineral resources that the Emirate possesses renders it globally competitive in a few manufacturing industries like cement, in turn making manufacturing relatively more significant for the Emirate.
RAK’s GDP shot up by 18.1% in 2005 to AED9.25bn (US$2.50bn), forming 1.9% of UAE’s GDP that year. The Emirate’s GDP has grown at a healthy CAGR of 10.0% in the period 2001-‘05, compared to a CAGR of 17.6% in UAE’s GDP. RAK’s GDP growth is especially creditable, considering its almost negligible dependence on oil (3.9% in 2005, as against 35.7% for UAE). It has relatively lower per capita GDP than in UAE, thanks to its high population density; RAK’s per capita GDP of US$12,645 was less than half of US$28,147 of UAE in 2005. Wholesale and retail trade has played a major part in the Emirate’s economy, having had a share of 16.1% of the GDP in 2005. Government services, which accounted for 14.0% to the GDP in ‘05, continued to be among the leading contributors. Among the major sectors besides crude oil; and wholesale, retail trade & repair services that have led the growth of the Emirate’s GDP are restaurants & hotels; electricity & water; and manufacturing. Other sectors, such as financial institutions & insurance; real estate & business services; and construction & building, too have had above-average growth during the period. Sectors belonging to the broad services and utilities sectors contributed over 57% of the GDP in 2005, underscoring their importance to the economy of RAK. Out of these sectors – wholesale, retail trade & repair services; real estate & business services; and construction and building – together contributed over 36% of the GDP in 2005.
Gross fixed capital formation (GFCF) in RAK amounted to AED2.0bn at the end of 2004, having grown by 12.0% in 2004 and at a CAGR of 10.0% since 2001. Sectors such as social & personal services, crude oil, manufacturing, and electricity & water were among the sectors with the highest CAGR in gross capital formation during 2001-’04. However, in terms of share in the GFCF at the end of 2004, real estate & business services; manufacturing; transport, storage & communications; electricity & water; and social & personal services were the toppers. The five sectors accounted for close to 75% of the total GFCF at the end of that year. Collectively, they showed a higher growth rate than the GDP during the period. This is a very healthy rate of capital formation, and is a good augury for the economy, in general, and these sectors, in particular. As in the case of the whole of the UAE, RAK’s economy too is highly dependent on trade. Based on the non-oil trade, the Emirate’s economy had recorded huge trade balances in recent years till 2003, thanks to high quantum of value added re-exports from the Emirate, coupled with low imports. The years 2004 and 2005, however, saw a reversal of this trend. While the re-exports declined in these two years, the imports dramatically shot up in 2004, leading to a trade deficit that year. While the imports declined in 2005, there was still a trade deficit that year, though lower than in the previous year.
For the year 2005, all components of the UAE’s CPI rose over the previous year. Major components, such as House Rent & Related Housing Items, Transport & Communication, Food, Beverages and Tobacco, and Recreation, Education & Cultural Services rose in 2005 compared to the previous year. The rise in the index for House Rent & Related Housing Items reflected the firming up of house rents in the country riding on the back of growing demand from the ever-increasing population. That apart, the inflation across various groups of consumer items in UAE in 2005 would seem to have been caused by domestic demand-pull alone, rather than in conjunction with steeper costs. Going forward, we expect the UAE economy’s heavy reliance on imports to continue. A weakening US Dollar would continue to have a benign effect on the price levels as in the past. However, the upward pressure on the prices, on account of the robust demand, is likely to offset the lower costs. All the same, the recently announced caps on annual rent increases stipulated by the governments of the different Emirates should ease the pressure on rents and act to cool the CPI.
Market activity…..
GCC bourses saw 18.6bn shares being traded in Mar-07 as compared to only 13.9bn shares being traded in the previous month. Value of shares traded on the bourses too increased to US$126.1bn in Mar-07 as compared to US$80.5bn reported in the previous month. Saudi Arabia saw hectic trading activity amidst declining market as 8.07bn shares changed hands during the month.
Table 03: Exchange Activity
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Country |
Source: Respective Stock Exchanges and Global Research
GCC stock market breadth was skewed towards the decliners in Mar-07 as 277 stocks registered monthly declines as compared to 187 advancers. Saudi market saw widespread sell-off during the month which resulted in 70 stocks out of 88 listed on the bourse showing monthly declines in Mar-07.
Table 04: Market Breadth
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