Non-cyclical sectors as consumer staples and utilities are expected to perform better than commodities and financials in the Middle East and North Africa (Mena), where the equity market is likely to be “volatile” in the near term, according to NBAD.
For the past year and a half, Mena equity markets have corrected sharply and valuations are now beginning to look “attractive,” with some stocks trading on valuations that are looking rather bombed-out, NBAD said in its Investment Outlook Report 2016.
Expecting corporate profit growth to be in low single-digits in the current year; it said, “Across the various sectors, we think the non-cyclical sectors - consumer staples and utilities, for instance - will perform better relative to cyclicals - commodities (downstream oil products), and financials, which will be feeling the brunt of tightening monetary conditions in local economies.”
A recovery, and some stability in oil prices, will ultimately determine the timing of any re-rating in Mena equity markets, it said, adding in the near-term market performances will likely remain volatile as oil prices are expected to remain within a low range, at least for the current half-year.
Nevertheless, NBAD expects the Mena region to grow between about 2.2% and 2.5% in 2016, given the apparent commitment to non-oil and gas projects.
Markets generally overshoot on the upside and the downside, and “we expect to see some good buying opportunities leading to the generation of decent returns by the end of 2016.”
Finding that the long-awaited verdict regarding the Qatar/FIFA World Cup is out; NBAD said, “We expect the related infrastructure projects to gather momentum in 2016, supporting economic growth.”
Looking ahead across the region, continued government spending on other strategic projects such as Expo 2020 will drive growth not only up to and during, but also beyond the due date, it said.
Each country within the GCC (Gulf Cooperation Council) has its own unique features, and the exact mix of reform options varies, according to a range of factors such as their population profiles, it said. On the currency peg, NBAD said it expect this to remain in place for the next few years as the benefits of stable currency regimes continue to outweigh the negatives in the minds of officials, especially in this period of stress.
Despite various regional currencies appearing theoretically overvalued - and especially with oil prices trading close to $30 a barrel; it said “we don’t expect (currently) unnecessary changes to be made soon.”
NBAD also said it do not foresee any slippage regarding reforms, even if oil prices recovered, because fiscal breakeven oil prices are still higher than the authorities would like them to be, and fiscal arrangements, similar to those seen in the West, are now being steadily introduced.
“As more of the growth burden is borne by the private sector across the GCC oil producers, more industrial diversification across equity indices should result,” it added.