Middle East equities: momentum picking up

Gradually oil is becoming less important a driver for the Middle East equities

After a strong Q4 performance in 2016, market experts see near-term consolidation risks. However, they also predict further upside beyond a potential consolidation, as improving macro indicators are starting to feed through to earnings forecasts.

However, headwinds remain from weak job growth, fiscal austerity and (for some countries) a stronger dollar. While at the same time, there is a potential for geopolitical risks to increase under the new US President Donald Trump administration.

“Since September 2016, the Middle East markets have enjoyed an impressive rally, with the region gaining 17 percent in Q4 of the last year. This was by far the strongest performance by any region and allowed the Middle East to post a modestly positive return for 2016 overall,” said Fahd Iqbal, Head of Middle East Research at Credit Suisse.

“The key driver for this was the strong recovery in both risk appetite (post the US presidential election) and oil prices (particularly after the unexpected OPEC deal),” said Iqbal, adding, “For most investors, the latter would seem to be the obvious driver for Middle East equities, but as we have highlighted many times in the past, the region has historically not shown any greater correlation to oil prices than the rest of the world due to the lack of energy-related equity listings.”

Notably, during the period of high oil prices from 2010 to 2014, the Middle East had a lower correlation to oil than the global markets. However, this has changed since the oil price crash and its central role in the region’s process of fiscal reform.

However, with oil prices having improved, oil is becoming less important a driver to Middle East equities and there is no doubt that a sharp move in oil prices would once again affect regional equities.

“Expectations of dividend payments will remain strongly supportive for the regional markets. The majority of Middle East companies make annual dividend payments in calendar Q1 and, as a result, investors tend to position
themselves accordingly towards the end of the preceding Q4,” pointed out Iqbal.

Given the high level of government ownership across the major listed equities in the region, the payout ratio has historically been above the global and emerging market average.