Oil fluctuations affect GCC bourses

Aggressive correction in the global oil prices has affected the GCC stock markets, says Sachin Mohindra of Abu Dhabi Investment Authority, Invest AD.

How do you rate the performance of GCC stock markets in 2014?

The performance of GCC markets was mixed in 2014, with the first nine months characterized by a steady uptrend, and the last three months witnessing extreme volatility. A strong downward bias in the first two weeks of December, driven by an aggressive correction in global oil prices, erased the year’s gains before a sharp rebound brought some relief to investors.

What is your outlook for GCC equity markets in 2015?

The recent market correction brought down valuations of a number of well-managed companies to attractive levels, especially considering underlying earnings growth. This makes us optimistic about the prospects of GCC equity markets in 2015. Although the uncertainty around oil prices may affect sentiment in the immediate short term, we feel that the encouraging fundamentals of companies, coupled with continuing high liquidity in the markets, should drive markets higher over the next 12 months.

Do you expect any major impact next year after the upgrade of the UAE and Qatar to emerging market status?

The upgrade has clearly put both the UAE and Qatar on the radar screen of a number of large actively managed emerging market funds. We expect a gradual but decisive increase in interest from these investors in our markets. Whether or not this interest translates into investment flows in the short term would depend on absolute and relative valuations in 2015. The recent correction has brought valuations in line with other emerging markets, and certain companies look much more attractive compared to three months ago.

Where do you see most value?

Our current fundamental analysis work makes us bullish on companies, which derive a significant part of their earnings from domestic demand in the GCC Countries. The recent correction has been brutal and has not differentiated between stocks based on company fundamentals. We therefore see value emerging in a number of companies across different sectors and countries.

What macro-risks should investors be looking out for?

The GCC has made extremely creditable progress in economic diversification over several years. However, the upstream oil sector still accounts for a significant share of revenues and remains a key contributor to GDP. Consequently any prolonged weakness in global oil prices remains a key macro risk for the region. A slowdown in the implementation of infrastructure and other economic diversification projects is a related risk. Other macro risks for equity market investors are not specific to the GCC and include any higher-than- expected slowdown in global growth, the pace and timing of interest rate hikes in the United States, the prospect of deflation in key economies such as Europe and Japan, and prolonged currency weakness in certain emerging markets.

What trends will encourage more companies to IPO in 2015?

Liquidity trends and investor sentiment are the key determinants of the IPO pipeline. Other factors that will influence IPOs are the growth plans of private businesses in the GCC and their financing needs. Regulators across the region have initiated measures to encourage privately owned businesses to consider listings. We believe that a number of these companies are evaluating an IPO. However, the actual timing will depend on prevailing valuation, liquidity and sentiment trends in 2015.

Sachin Mohindra is the portfolio manager for Invest AD’s SICAV GCC Focus Fund.