Kuwait fares well in relationship between Dividend Yield & Government Bond Rate
Global Investment House –Kuwait - The global financial turmoil storm has rolled across the Persian Gulf, sending jitters to the financial system. As a result of globalization, gulf markets also faced the burnt which was also accompanied by dwindling oil prices which are down more than 50% from their all time highs this year. The explosive, petroleum-fueled growth of the Gulf now looks suddenly vulnerable at the same time as international and local investors are pulling back sharply.
Previously, one of the Gulf's attractions for international fund managers was a historical lack of correlation to world markets due to the prevalence of retail investors who paid little heed to global business cycles. Over the past years, the correlation between the Gulf markets and the world has increased significantly. Most Gulf markets continued to imitate international trends and moved in response to the movement of international markets.
The linkages between regional and global markets began increasing in 2006 when the region - particularly the United Arab Emirates and Qatar - started attracting heftier amounts of international capital. Since 2006, the foreign direct investment made by GCC countries have doubled to US$41.5bn at the end of 2007 from US$21.7bn in 2006. Foreign direct investment made by GCC in stocks abroad has also increased from US$29.63bn in 2006 to US$81.5bn at the end of 2007. As a result of their investments abroad, the GCC markets also felt the brunt of crashing markets.
In such times, investors in GCC, though very nervous and upset, should look for opportunities to accumulate stocks of companies in the countries with high dividend yields. Because with expected slowdown in key economic indicators and surplus and a resultant decline in earnings growth, investors will focus on defensive stocks with decent dividend payout as probability of increase in profitability is declining.
As evident from the accompanied table, Kuwait offers decent dividend yield amongst the GCC markets at current prices. Highest dividend yield is being currently enjoyed by Oman and Bahrain. On the other hand, when dividend yield is compared with government bond yield which are set to mature after one year, Kuwait ranks at the top with a greater difference between the dividend yield and government bond yield.
Government bond carries re-investment risk, unlike in the case of stocks. The forward rate of bonds after few years is not the same as of now. On the contrary, dividend yield few years down the road, would increase in line with earnings growth.
Kuwait, Oman and Bahrain are the most attractive markets while Qatar is the most expensive in the GCC. Kuwait market has remained quite mature and has declined the least along with Bahrain and Qatar and at current prices Kuwait prices fairly better on the P/E and P/Bv multiple of 8.2x and 1.60x respectively.
