Notwithstanding the GCC’s “strong” macroeconomic fundamentals and commitments to infrastructure investment programmes, the region’s growth will be in the range of 2.5%-3.5% this year, QNB Economics has said in a forecast.
Kuwait’s 2016-17 draft budget expects a deficit even though the government is embarking on fiscal consolidation. Bahrain’s Q3 GDP growth was 2.4%, driven by the non-hydrocarbon sector. PMIs in Saudi Arabia and the UAE fell further in January in line with lower oil prices, it said.
In its latest ‘Economic outlook,’ QNB Economics said concerns about China’s currency, low oil prices and weak advanced economy data have led to a sharp sell-off in risk assets. As a result, expectations for policy rates at the major central banks have been revised down and long term sovereign bond yields have fallen.
US GDP and manufacturing data weakened significantly. In Europe, the tepid growth pace is continuing, making additional monetary stimulus likely.
Emerging markets (EMs) continue to suffer from capital flight and slower growth in China. Low oil prices are testing GCC government finances, leading to spending cutbacks and slower growth. Sub-Sahara Africa (SSA) continues to face significant headwinds.
QNB Economics said it remains “overweight” on equities over a 12-month horizon as it forecasts they still offer the best return prospects compared with other asset classes. However, the return trajectory for equities is flattening - high valuations reduce the buffer for shocks and increase risk of drawdowns.
“We see little scope for further multiple expansion in 2016 and expect only moderate earnings growth. Risks are weaker global growth, a steeper Fed rate hike path and sharp Chinese yuan devaluation. We are neutral equities over three month due to risk of lower oil prices,” it said.
On GCC equities, QNB Economics remains “neutral” and said the “positive correlation with oil price and geopolitical tension” are the main reasons behind the weakness for GCC equity market in 2015. The volatility in the oil prices have kept investors uncertain of the market direction and limit their participations.
“Going forward the outlook is challenging for GCC market’s, despite the large buffers and available financial reserves some GCC countries announced more conservative approach regarding their government spending in 2016-17. The outflow of funds made the valuations attractive with a potential capital appreciation once the oil prices stabilise and corporates announce their dividend, which would be positive in the near term,” QNB Economics said.
On commodities it remains “negative” and said it is due to near-term downside potential, in particular for oil prices, as demand weakness over 2015 has compounded the oversupply associated with transitioning into a new exploitation phase of the commodity supply cycle.
In the near term, QNB Economics sees risk of reaching storage capacity in the oil market – which could force spot prices to cash costs of around $20/b.
The recent slowdown and rebalancing in China has seen metals demand decline visibly, it said.