JEDDAH: There was no perceptible difference in the scale and magnitude of issues that haunted the market post-financial crisis as companies are still busy repairing their balance sheets and image, while governments are busy spending with nothing specific to write home about regarding regulatory reforms, Kuwait Financial Center (Markaz) said in its report "What to Expect in 2011". The report noted that while oil prices did not show any negative surprise in 2010, it was not enough to propel the market. In the wake of mounting pressures in the form of weak earnings, ultra weak liquidity and ever present volatility, stable oil price alone is not sufficient to lift the markets to heights that investors are used to in the past. One possible reason for the ultra poor liquidity is that retail investors (constituting the backbone) are still busy putting their house in order while sources of traditional funding for stock market (bank lending) has come to a complete halt. Earnings destruction in certain cyclical sectors like the investment sector has been too severe to stage a meaningful comeback. Even the elephant among the sectors, i.e., banking, continued to surprise investors with high levels of provisioning. Given firmer oil prices and a better global economic environment, the GCC is set to show stronger growth going forward despite slower private investment/credit growth continuing to be a drag on economic growth. Private demand is expected to remain weak in the intermediate term until investor confidence returns more fully and bank balance sheets return to a healthier state. Overall, Markaz remains optimistic in 2011, with positive outlooks for Kuwait, Abu Dhabi, Qatar and Oman while neutral for others. There are several interesting investment themes at play. "We reiterate our strong belief that high volatility should be a source of portfolio strategy rather than a problem. We also provide some ideas in the space of defensives and cyclicals. We believe that GCC is a good yield play. Watching analysts' coverage can provide some important clues to stock picking. Strategies that benefit in a low liquidity environment are also emphasized. Finally, it is time to remove the wheat from the chaff through the lenses of corporate governance." The report marked a Neutral outlook on Saudi Arabia for 2011 "due to moderate economic activity and expensive valuation (inflation is a factor to be watched in addition to the struggling real estate sector). Positive factors arise in the corporate earnings segment in addition to the geopolitical and regulatory arenas." Following the global financial crisis, real GDP growth in the Kingdom was forecast to push past 4 percent in 2010. However, continued uncertainty in the region led to the growth rate falling a bit short. Real GDP is estimated to have grown between 3.4 percent - 3.7 percent in 2010, a significant improvement from the 0.6 percent logged in 2009. Healthy crude oil prices are expected to offer some support to fiscal and current balances, despite increased government spending aimed at enhancing growth in the coming years. Real GDP growth is expected to be between 4 percent-4.5 percent in 2011, the report said. Market liquidity remains a concern for all GCC markets. In the Kingdom, the market remains fairly open to foreign investors and the regulatory structure is relatively sound with active capital market/monetary regulatory bodies. Markaz remains Positive on Kuwait in 2011 due to positive economic indicators and corporate earnings health. One area of concern is in valuations. Market liquidity, or lack thereof, is also a concern. Kuwait's economy is slated to have grown at about 3 percent in 2010, which would be half the historical average. This growth is expected to bump up to 4.5 percent in 2011 on high commodity prices, which will maintain the fiscal balance at about 21.5 percent of GDP. Additionally, the country has enacted a $107 billion, 5 year economic development meant to stimulate various economic sectors. On the corporate earnings side, after the turnaround story of 2010, corporate earnings are expected to resume a more stable course, growing at about 32 percent. Value traded is down 55 percent so far in 2010, a further contraction from the 44 percent decline seen in 2009. Abu Dhabi remains Positive, however Dubai is marked Neutral. The UAE economy fell short of its 3 percent real GDP growth for 2010 and managed an estimated growth of about 2.4 percent , which is expected to increase to 3.2 percent in 2011, the report said. Inflation was at 2 percent in 2010 and is expected to bump up to between 2.5 percent - 2.8 percent in 2011 as economic growth picks up. Additionally, the geopolitical and regulatory arenas are considered to be stable. However, lack of liquidity remains a problem as value traded in the UAE continues to dry up. The debt issues in the UAE will continue to be a drag on economic growth as banks provision against possible losses and remain wary of funding new projects. Dubai has over $42 billion in debt obligations due in 2011/2012 and an additional $55 billion beyond that. As the more economically robust emirate, Abu Dhabi will also be watched closely in terms of its support of Dubai. On the other hand, corporate earnings should return to growth in 2011. After declining by an estimated 6 percent in 2010, growth is expected at 24 percent in 2011. Qatar's outlook is Positive, owing to its high economic growth prospects, healthy banking sector and heavy government support. Qatar's GDP is expected to have grown 16 percent in 2010. 2011 growth is expected to be between 15 percent -18 percent. High fiscal expenditure and preparations for the 2022 World Cup should lead to a boost in economic activity going forward through government-mandated, large-scale infrastructure projects which would boost the construction and real estate sectors over the coming few years. Qatar, like the rest of the GCC, is facing lower liquidity as value traded so far in 2010 has fallen over 50 percent versus a decline of 46 percent in 2009. The outlook on Oman is Positive due to relatively healthy and sustained economic growth and positive corporate earnings. Areas of vulnerability remain in the geopolitical arena, investor sentiment and market liquidity. The report gives a Neutral outlook on Bahrain, as the economy continues to grow while corporate earnings remain healthy. Corporate earnings are expected to show a growth of 28 percent in 2010 due to strength in banks, but mitigated by telecom weakness. In 2011, the banking sector is expected to grow by about 28 percent pushing aggregate growth to 26 percent.
