Equity markets in the Gulf are slated to remain volatile in the near term and the investors’ preference will be for the defensive sectors with relatively inelastic demand for their products and services, combined with higher domestic revenue contribution, Kamco Invest said in a report.
In the long term, once the growing fears of the impact of Covid-19 begins to subside and oil market condition improves, the share prices of sector leaders with strong balance sheets and working capital flexibility in the near term underperforming sectors, are expected to recover rapidly and outperform in the second half (H2) of 2020 on improved revenue visibility and unwinding of supply chain shocks.
For the GCC (Gulf Co-operation Council) equities, “we believe investor expectations will now be more focused on the pace of business recovery for frontline stocks and sector leaders with solid balance sheets in H2-2020, and 2021 earnings expectations.”
Currently, investors can play the dividend opportunities that have emerged (more than 5% dividend yields), with certain dividend record dates beyond March 15, 2020.
Kamco Invest’s most preferred (defensive) sectors are utilities, telecom and consumer. Within the consumer, the preferred are education, staple food producers and healthcare service providers; while the least preferred are airlines, logistics, real estate, capital goods, banks and insurance.
The recent lowering of interest by the US Federal Reserve by 50 basis points, followed by a similar reaction by most of the GCC central banks could directly impact net interest income for the banking sector and lower NIMs (net interest
The lower interest rates post the rate cut from the Fed should allow more GCC debt (conventional and sukuk) issuances; while other funding options such as privatisation, listing and partial sale of state-owned assets and ample foreign exchange reserves remain available.
GCC equity markets are currently pricing in current lower oil prices persisting as the new normal and impacting the GCC economic fundamentals permanently and Covid-19 continuing to dislocate full earnings potential of the GCC listed companies.
GCC markets followed global trends but the 25% decline in oil prices, the biggest single day drop since the 1991 Gulf war, came as a double blow for the oil exporters in the region as the growth in oil production comes at a time when world oil demand is under severe pressure due to the Covid-19, according to the report.
The spread of the Covid-19 continues to be one of the key reasons for the decline in world markets that got amplified with the steep fall in oil prices after Russia stepped out for the Opec+ agreement.
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