For second quarter 2009, the Kuwait-based Markaz Financial Centre on Thursday reported its outlook for various asset classes like equity, fixed income, private equity and real estate. For equities, the report had a neutral view. This is because of earnings weakness to continue along with weak liquidity. However, the good point is the cooling off in volatility along with some sort of macroeconomic stability, especially inflation. As for the other asset classes, bonds look to be the most interesting asset class for the moment. The report states that the market is flooded with mouth-watering yields (albeit with attendant risks). However, the secondary market continues to be shallow. Also, the GCC private equity market is helped by low financing cost as well as great bargain hunts. However, liquidity is a concern. The real estate outlook is negative due to weak demand while supply is bountiful. The report notes that banks will shy away from lending at least for some time. The year 2009 may present an opportunity for significant changes and growth in the Sukuk market, Markaz said. The boom of recent years fostered an increasing interest rate environment mainly in order to contain inflationary pressures in the economies of the GCC. However, the global financial fallout has brought that boom to a halt and GCC economies are currently in a declining interest rate mode in order to spur economic growth and encourage spending. The report expects a declining interest rate environment to attract a surge of Sukuk sales in the near-intermediate term as yields become more attractive. An expectation of increased sovereign participation in the GCC debt market, Qatar and the UAE have announced large-scale debt programs, has already filtered into the CDS market, as most 5-year sovereign CDS spreads have narrowed in the past month after widening in late 2008 and the first two months of 2009. The largest decline has been in Qatar's 5-earyr CDS spread, which has tightened to roughly 250 bps from over 300 bps in February 2009. Average current yields on what the report categorizes as “high octane” Sukuks (those with yields of over 20 percent) is currently at 41.7 percent, more than 4x higher than current yields of what the report terms as “moderately aggressive” Sukuks (with yields between 5-20 percent), which have averaged 10 percent in 1Q2009. Average current yields on “conservative” Sukuks (those currently yielding less than 5 percent) stands at 3.74 percent. The majority of Sukuks fall into the “moderately aggressive” category, i.e. yielding between 5-20 percent, followed by “high octane” Sukuks, which have yields above 20 percent. A small number of the Sukuks are of a “conservative” nature, i.e. with yields less than 5 percent, including the ADIB Sukuk, which is highly rated by both Fitch and Moody's. Accumulated oil revenues may provide a cushion for sovereign entities in the GCC through 2009, but should oil prices remain subdued in the longer term, and a more drawn-out economic downturn ensue, the one would expect to see a jump in sovereign Sukuk issuances as the GCC states attempt to push forward with large-scale infrastructure projects and, in some case, plug budget deficits in the face of dampened oil prices. The governments of Qatar and the UAE have already announced large-scale debt programs. After the particularly painful, and wealth shattering, fourth quarter of 2008, investors in the GCC are taking a wait-and-see approach to investing and are more likely to place funds in government-backed issues rather than corporate Sukuks. The report notes that there is currently a high level of risk aversion among investors, but would expect demand to pick up towards the second half of 2009. Some analysts believe that global Sukuk issuances could more than double in 2009, with approximately $39 billion in the pipeline, of which the GCC is slated to provide roughly two-thirds, while other analysts predict that global issuances are not likely to exceed even a “couple of billion” dollars. The report feels that such a negative outcome will not occur; having said that, the author does not foresee issuances surpassing 2007 levels either. The report expects the second quarter of 2009 to remain sluggish before picking up in the latter half of the year. Private equity firms are in a unique position going into 2009. Fund raising activity was high in the past two years, with $6.4 billion raised in 2008, following a $5.8 billion raised in 2007. However, despite the fact that fundraising has been on the rise, investment activity, or deployment of capital (particularly in the region) has been low and declining with the number and size of investments shrinking 22 percent and 31 percent, respectively, in 2008. Financial markets and economies are currently going through a state of de-leveraging whereby credit lines have tightened considerably and funding for deals has dried up. GCC governments are racing to inject liquidity into their economies by shoring up local banks, however, the report does not expect this liquidity to be funneled into private equity deals in the near term and it is anticipated that lesser known private equity houses, with less of a track record, may see their credit lines from local, and international institutions, cut off until liquidity and confidence returns to the global financial system. The global financial meltdown of late 2008 has resulted in depressed valuations for many companies (both listed and unlisted), which may prove to be attractive investment targets for private equity firms. On the flip side, private equity firms would be able to provide financing to companies that have seen their traditional sources of funding closed off. There have been 7 entry transactions so far in 2009, which is on par with the same period of 2008 where 10 entry transactions had been completed. The report expects investment activity to pick up in 2009 as private equity firms deploy capital on undervalued companies. The global financial fall-out has resulted in a significant flight-to-safety for investors on a global, and regional, scale. As a result, the report expects fundraising to be difficult, if not impossible, in 2009. In the first quarter of 2008, 3 funds had closed with a total value of $754 million, whereas the same has been nil for the first quarter of 2009. The preferred mode of exits in the GCC/MENA region has been through IPO's due to the buoyancy of the region's equity markets. However, the report expects these to be scarce in 2009 as equity markets continue to be unattractive for IPO's, in addition to tight liquidity limiting the viability of trade sales. The IPO market has grounded to a near halt, Markaz said, with the value of IPO's plummeting 98 percent in the first quarter of 2009 to $99 million versus $4 billion in the same period of 2008. The overall earnings for GCC for Q408 was a loss of $13 billion as compared to a profit of $14 billion on a YoY basis. For the full year 2008, the numbers indicate a negative growth of 39 percent. The factors that are affecting the overall earnings growth are a steep decline in earnings in the financial services segment due to massive write downs and mark to market losses, real estate segment due to price and demand decline and the commodity segment due to price and volume decline. Among the six GCC countries, the worst affected in 2008 was Kuwait with a decline in earnings by 96 percent. Qatar is expected to post some revival in earnings on a QoQ basis as majority of the earnings are from commodity driven companies and there has been a modest turnaround in commodity prices as compared to the December 2008 quarter. Saudi Arabia is rated negative on earnings. The commodity-related development in Saudi Arabia is continuing to witness significant weakness. The banking, real estate and the rest of the financial sector will continue to be pressurized. On the liquidity front, the aggregate value traded level has seen a 20 percent decline on a QoQ basis in Q12009 and a YoY decline of 63 percent. Liquidity levels are rated negative across the region for Q2 2009. __
