Following Dubai's debt problems, GCC equities will see a neutral to negative sentiment in the first half of 2010 and an improvement in the second half based on a negative near-term outlook for the financials sector (50 percent of the region's market cap) before credit costs normalize and margins start to improve by the second half of this year, Credit Suisse said in its latest report. The report also forecast that global equities should continue to outperform as an asset class in the first half of the period under review. However, sentiment may turn negative in late 2010 owing to global reflationary measures, including interest-rate hikes, it added. “Following Dubai's debt problems … it will take global investors a couple of quarters to regain some of the confidence lost and start to allocate ex-benchmark funds to the region.” Global reflationary measures-policy tightening including interest rate hikes in 2H10 - may lead to a bear market in late 2010, it said. Conversely, the GCC could be neutral to negative in the first half as the banking sector will likely continue to see high credit costs and marginally lower margins, Credit Suisse said. However, by the second half credit costs will be normalizing, coupled with a return to balance sheet growth (especially in Qatar and Saudi Arabia). “Any global interest-rate hikes in H2 would be a significant positive factor, especially for Saudi banks, which are most sensitive to changes in spreads. Given that the banking sector accounts for around 50 percent of GCC market cap, … GCC equities are unlikely to outperform global equities until the banking sector's outlook improves,” the report said. It said equity issuance will likely to overshadow debt. From being the least levered in the world - at 9 percent of net debt to equity in mid 2007, GCC equities are currently the most levered, with 2010 net debt to equity of 73 percent. “This will imply more equity issuance/funding and an increased risk of dilution for shareholders,” the report noted. Saudi Arabia is the least geared GCC economy (sovereign debt to GDP of 14.9 percent in 2010), with high FX reserves ($395 billion in 2009, 101 percent of GDP), and falling inflation will likely accelerate public spending. Globally, Qatar is the fastest-growing economy (2010 real GDP of 14.2 percent), supported by increasing revenues from expanding LNG capacity (47 percent y-o-y in 2010). Qatari firms benefit from strong government support and domestic stocks look attractive (at discounts of 23.6 percent and 10.2 percent to EMF and EMEA, respectively) despite having the highest forecast profits in a global context (EBITDA margins of 17.7 percent and 49.1 percent). Kuwait remained underweight, but may look for entry points given the significant underperformance in 2009 has brought back relative valuations to historical levels, the report said. Moreover, Credit Suisse said as a result of Dubai World's debt restructuring, the market is likely to price quasi government bonds (in the GCC, especially in the UAE) on a par with corporate bonds. This is also reflected in the current CDs spreads, with five-year Dubai CDs still quoting 130 bps higher than levels before the announcement. “This is likely to lead to higher funding costs for corporate borrowers in the GCC,” it noted. It said every 100bps increase in borrowing costs is likely to reduce 2010 earnings by 5 percent in the UAE and 7.2 percent in Saudi Arabia. Funding costs are already close to rock bottom in the banking sector, it noted. The cost of funding for the GCC banking sector has been declining q-o-q this year, with Saudi banks averaging just 0.7 percent annualized in the third quarter of 2009. It forecast that “rates are unlikely to go any lower and are more likely to go higher from here,” hence for 2010, there will be the higher cost of funds for the banking sector “which will likely be partially passed on to the corporate and consumer sectors.” __
