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GCC markets saw a strong rally in the first half of 2014, with almost all major GCC indices ending in green. The S&P GCC index was up by 8.2% in 1H14, compared to the preceding full-year performance of 25%. Expansive fiscal and accommodative monetary policies, along with sustained oil prices at over USD 100, carried the momentum forward from 2013. The highlights for the first half of this year are the upgrade to emerging status accorded to U.A.E and Qatar markets, Saudi’s capital market authority announcing that Tadawul would be opened up to foreign institutional investors by 2015, and a record number and value of IPOs since 2008.

The year 2013 was sombre for global economies, as growth remained weak and fragile. In the US, low interest rates, along with a recovery in the real estate sector, accelerated growth despite fiscal tightening. Regardless of tapering down of asset purchase in the US, slowdown in the emerging markets moderated, as consumption compensated for falling investments. Eurozone trudged along, with tight credit conditions, austerity measures, and high unemployment rates dampening its progress.

Despite incessant geopolitical tensions in the region that continues to fuel uncertainty, 2013 was a splendid year for the GCC countries, as substantial fiscal surpluses, coupled with increased state spending ensured healthy growth rates. While oil GDP growth remained stagnant in the GCC, non-oil GDP growth was supported by large scale government spending. Kuwait lagged behind the rest of its peers, as political gridlock led to tepid growth in non-oil sectors. This, along with a 2% contraction in oil sector, caused economic activity in the country to grow by a meagre 0.8%.

In the first half of 2014, persistently high oil prices in the global markets, buoyed their GCC counterparts. Although hydrocarbon sector contribution to the GDP had steadily declined to 33%, it still constitutes 84% of total government revenues . The member countries, however, continued to invest heavily in non-hydrocarbon sectors, in a bid to diversify their economies. Despite various geopolitical issues in the region, GCC remains a safe haven, with their governments actively pursuing various policy initiatives, to diversify their growth engines, and improve competitiveness of their economies, albeit in varying degrees.

The year began with feverish anticipation of the MSCI upgrade of UAE and Qatar that was announced mid of 2013. The markets of both countries were on a steady climb since the announcement, with Dubai and Abu Dhabi exchanges posting a 108% and 63% climb in 2013, and Qatar registering a 24% increase during the same period. The indices carried forward the momentum into 2014, with Dubai, Abu Dhabi and Qatar recording a 50%, 19% and 31% increase in index value (till end of August 2014), respectively. Large infrastructure spending building up to the Expo 2020 and the 2022 FIFA World Cup propelled the banking, real estate and construction sectors.

Qatar index breached its ceiling multiple times by the end of August, with the upgrade to MSCI Emerging market index, subsequent rise in the proportion of Qatari companies in the index, and increase in foreign ownership limit from 25% to 49% driving the index to new highs. Qatar stock exchange witnessed a net foreign portfolio investment inflow of USD 1.9bn, in the first five months of 2014. Both the UAE and Qatar markets declined in the month after the upgrade took effect, however, positive Q2 results and passive fund flows lifted activity at both Qatar and UAE exchanges, and they seem primed to close the year on an optimistic note, yet again. Performance of Kuwait and Oman indicies lagged behind the rest of their peers,as Kuwait weighted and price index recorded a YTD-August performance of 9% and -1.6%, while Oman registered an 8% increase.

As part of ongoing economic reforms, Saudi Arabia’s Capital Market Authority (CMA) announced in July, plans to open up the stock market for direct investment by foreign institutions in the first half of 2015. The announcement led to the TASI index breaching the psychological 10,000-point barrier for the first time since 2007. While the opening up will happen in a phased manner, the markets are set to attract inflows worth USD 35bn, which the government hopes will help boost diversification efforts, as the country seeks to generate more non-oil sector growth . This move is expected to further increase the efficiency of the market, as companies will adhere to stricter corporate disclosure requirements in order to attract foreign funds. The news has already attracted the attention of large foreign institutions, such as Morgan Stanley, Standard Chartered PLC, Bank of America Corp, Credit Suisse, HSBC and JPMorgan, as many are waiting in the wings for the largest and relatively well-regulated GCC market to allow outside investors. By the end of August, the TASI index had climbed 30%, and closed on a six year high of 11,112 points.

Overall, 1H14 turned out to be quite positve for GCC indices, with four of six country indices recording double digit growth. Dubai (DFMGI) was the largest gainer (50.2%, YTD- August), followed by Qatar (31%) and Saudi Arabia (30.2%). MENA IPO market raised USD 2.4bn from 16 IPOs, in the first half of 2014, compared to 12 IPOs worth USD 2.1bn in the equivalent period in 2013. GCC countries had the largest share of IPO listings in MENA, accounting for 90 percent of the capital raised through IPOs in MENA, with 10 IPOs raising nearly USD 2.2billion. Saudi Arabia was the prime issuer in terms of number of issues and capital raised, with four IPOs worth USD 533.3mn, including the much anticipated listings of Abdul Mohsen AlHokair Group (USD 220mn) and Al-Hammadi Company (USD 168mn). The largest deal in H1, 2014 was by Mesaieed Petrochemical Holding Company, Qatar’s first IPO since 2010, which brought in USD 0.9billion, and accounted for 38% of the capital raised in the period.

Overall GCC market liquidity level surged to USD 414bn in the first half of 2014, an increase of 56% over the equivalent period from previous year. The increase was led by UAE markets, where value traded grew to USD 99bn surpassing the value traded for whole year in 2013 by 49%. UAE (291%) and Qatar (188%) had notable increase in liquidity levels in the first half of the year compared to the previous year value for the same period, attributable to trading activity that occurred in anticipation of the MSCI inclusion. Saudi Arabia (34%) and Oman (32%) witnessed YoY growth in value traded in the first half of the year, while Bahrain (-14%) and Kuwait (-57%) saw slumps.

The Road Ahead: Following the successful upgrade of UAE and Qatar markets into the MSCI Emerging Market Index, Saudi Arabia is vying for a similar upgrade. The announcement to allow foreign investor participation, albeit in a regulated manner, is seen as the first step in a bid to ramp up market reforms. For UAE, the preparations to host the World Expo 2020 should keep the non-oil growth ticking, while Qatar has several on-going projects in roads, ports, rail, metro, real estate developments and a new central business district in Lusail, as part of its infrastructure build-up to the World Cup (although there are recent talks that Qatar might lose its rights to host the World Cup owing to the weather). In Kuwait, the ensuing political stability has increased optimism for a revival in investment cycle. In the coming months, for various infrastructure projects, as envisioned in the development plan, the contracts are set to be awarded.

Although Fed’s QE policy will have tapered down by the end of this year, the question of when the interest rates would be hiked has not yet been properly addressed. After the recent FOMC meeting, speculation inthe market is rife that hikes in interest rates may occur either during the first or second quarter of 2015. Its effect on global markets, including the GCC, is a cause for concern. Oil markets have been relatively stable, despite regional tensions in Iraq, Syria, Libya, Egypt etc., due to the shale boom in the US, which has reduced supply pressures. However, fluctuating oil prices would impact government spending, and will have a spillover effect on other sectors in the GCC region. On the other hand normalizing conditions in the Middle East may lead to a fall in oil prices that would shrink the fiscal surpluses of GCC countries. Rising asset values and inflation are other worrying factors, affecting UAE and Qatar markets, in particular.

Saudi Arabia- Diversification and market reforms
Real GDP of Saudi Arabia is expected to continue its growth at a stable rate in 2014 and 2015, underpinned by robust non-hydrocarbon activity. IIF estimates non-hydrocarbon GDP to grow at about 5% in 2014, supported by the execution of large projects. Riyadh has several ongoing construction activities including housing projects, a new financial center, an additional airport terminal and a metro. Saudi Arabia is expected to announce its 2015-19 development plan in the coming months. New sectors such as automotives are expected to receive government support which, in turn, are expected to nourish ancillary activity across related sectors. Strong non-oil growth should receive additional support from recent labor market reforms, which had the effect of reducing unemployment. In terms of value traded, Saudi Arabia witnessed a 30% drop in 2013, from 2012 value of USD 512bn, but bounced back with a 34% increase in 1H14 (USD 270bn) over 1H13. Continuing credit growth and introduction of the new mortgage law will spur activity in both banking and real estate sectors.

Kuwait – Stalled development plans revitalized
IMF estimates real GDP of Kuwait to rebound to 2.6% in 2014 and 3.0% in 2015 after a slowdown 2013. In the near term, hydrocarbon sector growth is expected to be flat due to a rise in oil supply globally, on account of easing of sanctions imposed earlier on Iran, and continued growth in supply from US. The non-oil sector is expected to drive growth in Kuwait. The recently announced second five-year development will continue to foucs on infrastructure. Kuwait also enacted new legislations to ease impediments and attract foreign direct investments. The ensuing political stability in Kuwait has renewed expectations on implementing the much needed structural reforms to revive the investment cycle. Materialization of Kuwait development plan by way of tendering project contracts and execution of the same is expected. In terms of value traded, Kuwait posted a 40% increase in 2013, from 2012 value of USD 26bn, but fell 57% in 1H14 (USD 11bn) over 1H13.

The UAE- Winding down after the party
According to IIF estimates, tourism, transportation, and trade will boost non-hydrocarbon growth to 5.2% in 2014, but real GDP growth will be moderate in the coming years due to declining contribution of hydrocarbon sector. Aggregate corporate earning in UAE came in at USD 8bn in 1H14, implying a YoY growth of 16%. Value traded in the first half of the year was close to four times the value for the equivalent period last year, due to upgrade to the MSCI EM index and the stellar performance of banks and real estate. But the heady optimism might be waning, as the valuations no longer appear attractive. The Arabtec fiasco in June has also raised serious questions about corporate governance and the role of regulators in ensuring a fair, efficient and transparent market in UAE. Preparations for the Expo 2020 and investments in infrastructure and real estate, should ensure continued growth in the Emirates.

Qatar- Robust non-hydrocarbon growth
Qatar is estimated to post strong real GDP growth rates of 5.9% in 2014 and 7.1% in 2015. Stagnation in hydrocarbon growth has led to decline in real growth to single digit. But gas production targets in Qatar have largely been met, and there are no current plans for a further increase after the Barzan project comes on-stream in 2014/2015. Non-hydrocarbon growth on the other hand is expected to be robust. Share of non-hydrocarbon sector in GDP (nominal terms) is expected to rise from 46% in 2013 to 50% in 2014 as the economy gets more diversified. Infrastructure expenditure in Qatar between 2014-2018 (excluding oil and gas) is expected to be at QAR 664bn (USD 182bn, or about 90% of 2013 GDP). In terms of value traded, Qatar recorded a 34% increase in 2013, from 2012 value of USD 16bn, and followed it up with an impressive 188% increase in 1H14 (USD 28bn) over 1H13 value of USD 10bn, as a result of the MSCI upgrade.

Sector Focus
Banking and Financial Services Sector: With increase in non-hydrocarbon growth, improving economic prospects and tremendous increase in asset values, there has been a surge in lending across the region, in the first half of the year. Financial services gained the most during 1H14, a total earnings growth of 35% on a YoY basis, whereas, banking firms had recorded a YoY growth of 6% in the first half of 2014. GCC loans and deposts are expected to grow by 11% respectively in 2014, maintaining a loan-to-deposit ratio of 86%, while loan loss provisions and NPA are witnessing a declining trend, which is expected to continue this year. Large government spending on infrastructure across GCC and continuing credit growth augurs well for the sector.

Construction: Recovery of real estate and large government spending in infrastructure across GCC over the next few years, will lead to increase in demand for construction and related materials. The total worth of planned and un-awarded construction projects exceeds USD 1.09 trillion, roughly two-thirds of the GCC’s entire annual GDP . Kuwait’s new development plan for 2015-20 outlines construction of the USD 20bn metro and USd 8bn rail project, which the GCC railway project. Qatar and UAE are expanding their metro, rail and road networks in preparation for their respective key events. Saudi Arabia has embarked on a social infrastructure drive, with 742 new schools and 40 colleges under construction, and 17 new hospitals being built. Youthful, growing population, influx of expatriate labor, focus on middle and lower income housing groups, and relaxation of rules allowing foreign ownership of real estate, will lead to increased activity in the sector over the next half decade.

Top Tens
YTD returns for some of the stocks included in top 100 stocks by market cap have been significant. 3 stocks that gained more than 90% are Gulf International Services (139.8%), Arabtec Holding (135.1%), and Vodafone Qatar (98.4%). Other prominent gainers for the year include, Qatar Insurance Co (88.0%), Jabal Omar Development Co (79.8%) and Masraf Al Rayan (76.7%).

By Market Cap (Top 100)- Among the top three rankings, Saudi Telecom (USD 40.4bn) climbed four spots, and is currently ranked second, while Qatar National Bank (USD 37.2bn) dropped a rank, and ended at 3rd place. Largest decline from among previous year’s top 10 was for National Bank of Kuwait, down five places from last year’s 10th. The companies with the biggest increase in rankings in 2014 were Gulf International Services (Qatar) and Arabtech Holding (UAE), both of which rose 49 places from the previous year, while the largest fall in rankings in 2014 was by National Mobile Telecommunications (Kuwait), which fell 43 places to rank 96. Saudi Arabian companies dominate the rankings, with 44 companies finding place in the top 100, followed by Qatar (21) and UAE (18). Kuwait (14), Bahraini (1) and Omani (2) companies lag behind their GCC peers.

By Revenues- Agility Public Warehousing and Abu Dhabi National Energy did not feature among the top 10 this year, and were replaced by National Industrialization Co. (USD 2,553mn) at 9th place and Qatar National Bank (USD 2,500mn) at 10th place. Other companies in the list remained same with minor alterations in their rankings. Seven of the top 10 companies are from Saudi Arabia. Four of the top 10 companies are from Telecom sector.

By Earnings– Samba Financial Group did not feature among the top 10 (Rank 9 last year), and was replaced by Saudi Electricity (USD 732mn) at 8th place. The rest of top 10 companies in the list remain the same with slight alteration in their rankings. The biggest slides were from Industries Qatar (USD 780mn) ending at 6th place this year from last year 3rd and Etihad Etisalat (USD 723mn) falling three places from last year’s 7th. Out of the top 10, 4 were Banking and Investment Services, and 3 were telecom services firms. On country basis, out of the top 10, 5 were from Saudi Arabia, 3 were from UAE and 2 were from Qatar.

By Liquidity– 9 of the top 10 companies on the basis of liquidity are from Saudi Arabia. The three new entries to the list this year are Saudi Kayan Petrochemical, Saudi Arabian Mining and Wafrah for Industry and Development. Alinma Bank (USD 21.96bn) occupied the first position followed by SABIC ( USD 20.75bn). On the basis of sectors, there were two companies each from Real Estate, Banking, Telecom and Energy sectors.

Note: NA* means not appearing in Last Year Rankings.

This report was prepared by Marmore Mena Intelligence, a wholly owned research subsidiary of Kuwait Financial Center “Markaz”. Markaz is a leading asset management company based in Kuwait with fiduciary AUM exceeding USD 3.5 billion.