Dubai - Mubasher: Adding Saudi Arabia to the MSCI’s watch list for its Emerging Markets Index in June was a “favourable announcement” and should be a major catalyst for the market, Arqaam Capital investment bank on Monday.
The final decision as to whether Saudi Arabia will be added to the index, or not, will be taken in June 2018, while actual implementation will be in May 2019.
Such an addition will attract $60 billion to the Saudi market, assuming that the announced initial public offer (IPO) of Saudi Arabian Oil Co, known as Saudi Aramco, moves according to plan, the bank highlighted.
“We see macro risks in the GCC subsiding over the coming year as the bulk of required fiscal consolidation should now be behind us for the core of the GCC, Tarek Lotfy, president of GCC at Arqaam Capital said.
Furthermore, most GCC oil producers succeeded in adjusting to the lower oil price environment “rather rapidly,” he added.
“The oil price, in our view, should now remain within the USD 50-55/bbl range as the shale oil producers have brought down their production breakeven points close to these levels meaning that any increase in price should be offset by a quick increase in supply,” Lotfy stated.
He further indicated that his company expects future oil prices “to closely track spot markets as high cost producers need to hedge themselves.”
Real gross domestic product (GDP) growth was marginally negative in 2017 after the decline in oil production, Arqaam Capital’s president for the GCC noted, forecasting that growth was likely to resume in 2018.
“It is important to note here that non-oil GDP growth has mostly held up well in these countries, despite lower oil revenues and increased fiscal austerity,” he added.
Lotfy highlighted that this was positive surprise, for economic growth in these countries was chiefly driven by phased government spending, Arqaam Capital investment bank stated.
“We expect fiscal austerity to continue over the coming few years, but the pace should ease,” Lotfy continued.
On another note, the budget deficit for Saudi Arabia fell 5.5% in the first half of 2017, meaning that the country will remain below the debt/GDP target of 30% set by the government in 2020, he added.
“Stock valuations in the region offer some scope for further improvement as expectations had been set too low, and corporate earnings have beaten the street by some margin in Q2,” Wafic Nsouli, managing director of equities at Arqaam Capital, said.
“Valuations in the GCC remain compelling, with continued high equity risk premiums of c. 700-1,000 bps for some stocks,” he added.
