Government spending in the Mena region should drive up stock prices even though valuations are not as cheap as at the start of 2013. Reda Gomma, equity portfolio manager at Mashreq Capital, says itâs important to be selective.
At the beginning of 2013, equities in the Mena countries were significantly cheaper than comparable stocks in most emerging markets. This discrepancy helped to drive remarkable gains seen in a number of regional stock exchanges, for instance the Dubai Financial Market, which was up more than 80% by mid-November, the Abu Dhabi Securities Market, which gained more than 50%, and the Qatar Exchange, which rose nearly 30%.
Much of this “re-rating” has now been achieved, says Reda Gomma, equity portfolio manager at Mashreq Capital. Previously undervalued stocks in the banking, telecoms and consumer sectors are now in line with emerging market valuations, he says.
This means the pace of equity growth in 2014 is unlikely to match what has happened this year. However, Gomma still believes there are interesting opportunities for investors.
“Basically, the growth outlook is still intact for most countries and government expenditure will underpin this growth,” he says.
Gomma is bullish about the Mena region because it is one of the few parts of the world where governments are still planning to pump large sums of money into the economy. With fiscal tightening happening in the US, Europe and the large emerging markets such as India, this is a rare virtue.
The government of Saudi Arabia continues to raise its spending goals, Qatar is allocating billions of dollars for infrastructure projects, and the UAE is planning to expand its tourism industry. As governments deploy this cash, it will have an expansionary effect on the economy, filtering down into company profits.
“I see 15% growth in earnings in Mena next year. Most of these earnings will come from banks and from real estate, which is our top pick for Mena next year. Real estate is still undervalued compared to the rest of the Mena universe.”
Gomma is particularly optimistic about Saudi real estate. An ambitious housing programme announced by King Abdullah two years ago has another three to five years to run.
Meanwhile, there is high demand for land in the country.
“We prefer to overweight Saudi real estate in the next twelve months,” he says.
Other sectors in the Saudi economy have delivered good returns so far this year, but might do less well in future. Gomma has reduced his exposure to the Saudi consumer sector even though it was the main contributor to his fund’s return of 28% so far this year (the sector itself grew by about 50%).
Gomma’s motive for reducing his exposure to consumer stocks is that close to a million people have left the country this year as part of a crackdown on illegal workers. The fall in the population will reduce consumption, particularly in the consumer sector.
Gomma is also concerned about the banking sector in Saudi Arabia, in which profits will be affected by rules issued by the Saudi Arabian Monetary Agency that are intended to improve banks’ funding positions. The agency has put a cap on fees for retail banking, which could also affect profits.
However, in the medium to long-term, Gomma is optimistic about Saudi Arabian equities. He likes the good dividends paid by cement companies, and is attracted to telecoms companies because they still have space to expand their user base.
“Voice penetration has reached maturity but data is still underpenetrated,” he says. “We expect moderate growth of 5% to 10% in Saudi telecoms in 2014.”
Gomma is also bullish about Qatar, which he says is now seriously building infrastructure for the World Cup it will host in 2022. Banks will have to lend more to support the projects, says Gomma, and this will raise their profits. As banks are the highest weight in the Qatar stock index, this is good news for investors in Qatari equities.
“We prefer the banks that are suited more to public spending – I’m talking about QNB – as a proxy for increasing expenditure in Qatar next year,” he says.
Meanwhile, in the UAE, stocks related to the tourism and retail industry are expected to do well, especially given that Dubai has won its bid to be the the world Expo city 2020. There is likely to be a rise in tourists and government expenditure as the city prepares for the event. Gomma is optimistic about Dubai real estate and holds a strong position in Emaar, the Dubai real estate company.
The fourth Mena country that gets Gomma’s stamp of approval is Egypt. Gomma believes the aid given to Egypt by the GCC countries will stabilise its currency, which is essential for its economy to recover. He also believes the army takeover that ousted president Mohamed Morsi is a positive sign because it will restore order.
“With the referendum happening by the end of December, they will take another step in restructuring the country. When stability is there, tourism will come.”
Although Egypt has many challenges to overcome, and is likely to be volatile in the coming months, Gomma believes its stock market is still undervalued relative to the rest of the region.
In sum, Gomma is at least cautiously optimistic about most Mena sectors, with the exception of petrochemicals, because he expects the oil price to fall next year.
©2013 funds global mena