Large cap GCC equities set to deliver in 2013, says SICO Bahrain

GCC equities will generate returns of 10-15% in 2013 with large caps having the best prospects, a report from Securities & Investment Company (SICO) Bahrain has predicted.

The investment bank’s GCC Equity Markets Outlook report said that the 2012 trend of small-to-medium sized companies outperforming their larger counterparts was set to be reversed this year.

 “Large cap stocks, which had a subdued performance in 2012, are expected to outperform small cap stocks in 2013,” said the report.

Fundamentals are currently looking promising and the steady improvement in corporate earnings since 2009 has not yet been reflected in many valuations, the report argued. GCC banks are particularly well positioned as their asset position remains strong, the report noted.

“The asset quality of banks is currently better than previous years, leading to lower provision charges and higher net profits. GCC banks are well-capitalised and have ample liquidity, and are thereby capable of meeting increased domestic lending needs, driven by higher government spending on infrastructure and industrial projects. The regional project pipeline remains strong at about $2 trillion, and has grown by nine per cent year-on-year, implying a backlog equivalent to twice the GCC’s total current GDP,” the report said.

However, the SICO report also noted that foreign portfolio investment in the region has not yet picked up. GCC markets, excluding Bahrain, witnessed net foreign investment of US$ 0.81 billion in 2012 compared with an outflow of US$ 1.31 billion in 2011. Lack of interest from foreign institutional investors is set to continue, while retail investors will continue to dominate in the Saudi market, the report said.

Oman’s Ahlibank to launch Islamic fund

Oman’s ahlibank will launch its first Islamic fund for the MENA region following approval from the Central Bank of Oman and the Capital Market Authority (CMA).

Abdulaziz al Balushi, chief executive officer of ahlibank, told the Times of Oman: “We are planning to raise the fund from Oman and other Gulf Cooperation Council (GCC) countries, using the facilities of our group institutions.”

The initial sum raised by the fund, whose size has not been disclosed, will be invested primarily in Oman as well as in a portion of the Gulf.

The CMA has provided the bank with a list of Sharia-compliant companies for the investment of the corpus.

The announcement follows Oman’s recent consultation on Sukuk reform in line with plans to introduce Islamic Finance, as reported by Mena FM.

According to a recent Thomson Reuters survey, investors are planning to inject $200m into their portfolios this year and sukuk will represent 35% - 40% of this allocation.

Survey shows investors favouring GCC funds

Institutional investors in the Mena region remain concerned about political risk and are favouring funds in the GCC as a result, a survey has revealed.

However, asset allocations are shifting towards equity-based mutual funds and hedge funds, and away from fixed income, the MENA Asset Management survey conducted by FTSE Global Markets and the Qatar Financial Centre (QFC) Authority revealed.

Saudi Arabia, Qatar and the United Arab Emirates were identified as the investment destinations by the 90 investors in the survey, which was drawn by 12 countries. They cited the lower political risk and greater market liquidity of these markets. Countries with a perceived political risk fared worse, with Syria, Lebanon, Jordan and Egypt rated the most negatively by investors.

On-going political strife in North Africa and the Levant is likely to increase cross-border capital flows and further concentrate assets in more stable economies, the report concluded.

Andrew Neil, Head of Research and New Media at FTSE Global Markets, said: “Heightened political risks in the MENA region has two effects: the concentration of assets in those countries that are deemed more stable, and a shift in the types of assets employed. It is no surprise then that in the more stable markets in the GCC investors are increasingly looking at equity-based investments and in the riskier markets in the North Africa and Levant bonds seem to be the investment vehicle of choice, particularly the relatively safe haven of sovereign bonds.”

Yousuf Al Jaida, Chief Strategic Development Officer of the QFC Authority added: “This latest survey shows how investor sentiment towards the region is influenced by global as well as regional trends such as shifts in flows of trade and capital.”

Zain Iraq to launch IPO before June

Zain Iraq will float its shares on the Iraqi Stock Exchange (ISX) by June, it has been reported.

The announcement follows Asiacell’s successful trading debut after an IPO worth $1.3 billion last month, the biggest in the Middle East since 2008.

Zain Iraq’s Chief Financial Officer Wael Ghanayem expected demand for the company’s shares to be high, he revealed in an interview with the Washington Post yesterday.

One of three mobile phone companies in Iraq, the firm is required to list 25% of its shares on the ISX under a 2007 licensing agreement. Korek Telecom will also need to comply with this arrangement.

Mena FM recently spoke to fund managers who predicted that the follow-on from Asiacell’s IPO could represent a big boost to Iraq’s economy.

They were positive that the telecoms sector would play a key role in upcoming Iraqi investments, particularly as the sector is seen as one of the fastest growing markets in the world.

Invest AD portfolio manager Sherif Salem saw Asiacell’s IPO as a catalyst “which would immediately add depth and liquidity to the Iraqi stock market.”

He added that telecoms companies presented a clear opportunity for revenue and subsidy growth, although Iraq’s banks dominate the market.

Michael Daoud, vice president MENA sales broker at Auerbach Grayson, said Iraq’s private sector domestic credit as a percentage of GDP (9% according the World Bank) showed prospects for growth.

Ghanayem was equally optimistic about the investment possibilities presented by telecommunications and said that the company planned to invest 15% of its 2013 revenues on modernization.

“Starting a 3G service will open new growth horizons in the telecommunications industry,” he added.

A unit of Kuwait’s Mobile Telecommunications Co., Zain Iraq has a 13.7 million-strong subscription representing a 50% share of the market.

Advisors to the offering will include Citigroup Inc., National Bank of Kuwait and BNP Paribas SA.


Unlocking Iraq’s True Value

Economic forecasts for Iraq continue to make for pleasant reading. The most recent IMF World Economic Outlook predicted GDP growth of 10.2% in 2012 and 14.7% in 2013 and Iraq has one of the world’s largest oil reserves.

But the IMF also acknowledges that the task of rebuilding the country remains immense and that reconstruction requires not only the rebuilding of its infrastructure, but also of its economic and social institutions and the creation of a business environment that attracts capital.

The scale of the challenge is reflected in the performance of Iraq-focused funds over the last 12 months. Northern Gulf Partners’ Iraq Investment Partners fund was down 3% last year - after growing by more than 20% in 2011 - although strong final quarters enabled the Iraq Opportunity Fund and the FMG Iraq Fund to venture into positive territory. Unaudited figures for 55 North Company’s Iraq Phoenix Fund indicate growth of 5%.

Invest AD’s Iraq Opportunity Fund also bounced back in November, mainly as a result of positive investor sentiment in some of the larger-cap stocks, particularly Bank of Baghdad and North Bank, explains portfolio manager Sherif Salem. He adds that companies in the telecoms sector present a clear opportunity for growth in terms of both revenues and subsidies.


Telecoms boost


“In a market dominated by the banking sector, the upcoming IPO of Asiacell could give the market a boost,” adds Salem. “It is expected that it will involve the floating of a 25% stake in a deal that could be worth as much as $1bn, which would immediately add depth and liquidity to the Iraqi stock market.”

Iraq’s three mobile companies - Asiacell, Korek and Zain Iraq - are required to list 25% of their shares under the terms of licences bought in 2007, and forthcoming flotations could mean telecoms become a leading theme in many portfolios.

FMG investment analyst Henrik Kahm describes Iraq as one of the fastest growing telecoms markets in the world, while he is also bullish on the banking sector. He also refers to consumer stocks as “looking interesting, but still very few options currently listed” and expects more funds to enter the market once the custody issue is resolved (see box out).

There is general agreement that Iraqi assets are still undervalued. “Many companies have book value several times their market cap and companies in general are operating at a fraction of their future capacity,” says Kahm.

Iraq is not a ‘dirt cheap’ market - banks are trading at 1.5 times trailing earnings, on average - but future growth opportunities are evident when you look at domestic credit provided to the private sector as a percentage of GDP. The World Bank puts this at 9%, compared to 56% in Kuwait, 47% in Russia and 40% in Saudi Arabia, observes Michael Daoud, vice president MENA sales at broker Auerbach Grayson.

Paul Collison, managing director of investment management firm 55 North Company, agrees that there are investment opportunities both in ISX listed stocks and in foreign-listed firms with activities in Iraq. But he adds that many investors - especially retail/individual investors - will not be able to fully understand and evaluate risks. “Furthermore, we have come across numerous situations that (upon more detailed analysis) we would short if we were able to. Many listed companies have dismal prospects so investors must be careful of company-specific situations. Some can (and will) go to zero over time and others will experience negative news and shocks to their valuations, most likely around corporate governance and other issues.”

Northern Gulf Partners portfolio manager Bartle Bull reckons telecom IPOs and the continuing extraordinary growth in assets, deposits and profits of Iraq’s top banks are the next big investment story for Iraqi funds.

To this list, Collison adds completion of a critical mass of the oil and gas export infrastructure from Kurdistan to Turkey, and enactment of federal oil and gas law. “As hydrocarbon production ramps every quarter, incoming cash flows become extraordinary relative to the size of the country’s GDP, let alone the market valuation of its stock exchange,” he said.


Suppressed consumption


Daoud says the main investment story in Iraq for the last several years and for the foreseeable future is suppressed consumption because of previous wars and the sanctions imposed on Iraq from 1990 to 2003.

“Now this consumption is driving growth, alongside the rapid increase in oil and gas exploration and production. It is very hard to play specific sectors or themes in Iraq as the market is heavily dominated by banks, which constitute around 60-70% of the market cap and most of the activity on the exchange. The one name that I like outside of the banks is Baghdad Soft Drinks.”

For investment funds, Daoud accepts that the majority of investment is still going through companies listed on the ISX, but adds: “if you are talking about general investments going into Iraq, I would say it is off the exchange.”

Indeed, Bull concludes that the real foreign investment in Iraq to date has been direct investment, in private equity opportunities and oil. “With the Asiacell IPO and the follow-on opening up of the ISX to other capital raising, 2013 will be the year that public markets start to catch up as a way into Iraq’s economic boom.”

Al Mal Capital to take on staff as operations expand

Al Mal Capital is planning to increase its staffing by 20% this year in light of Dubai’s economic recovery, it has been reported.

The firm is also planning to launch two new funds during the year as it concentrates on growing its asset management division, Deputy Chairman Naser Nabulsi said in an interview with Bloomberg.

“The recovery is real and will continue going forward,” said Nabulsi. “When things are looking good for the economy, we’re going to do just as well,” said Nabulsi.  “The first phase was to swim and survive, and we survived… 2013 is going to be a good year for companies who prepared for the next cycle.”

Following the global economic crisis, the investment bank was forced to reduce its team from 100 to 20 as well as closing its securities brokerage.

But Nabulsi said that investor confidence and market momentum were now once again increasing.

 “We’ve seen fierce cash coming into Dubai equities from Saudi, Qatar and foreign funds and into real estate.”

Al Mal wants to increase its annual assets by 25% within the next five years and two of the new staff hired will be in Asset Management.

“Our attention will be on growing the asset management going forward,” he said. “We may start to see a lot of family companies going public. A lot of them are waiting for the end of the first quarter to make sure this is a genuine recovery.”

Al Mal was unable to provide further details of the new funds it wants to launch.

The Dubai-based investment bank also plans to start wealth management services in conjunction with partners in Turkey, India and the UK to promote third party funds.

Nabulsi said he was confident that “stability, growth and security” are all present in the UAE, and that investors can be sure of solid returns.

The company currently runs eight funds, including three Public Equity Funds: the Al Mal MENA Equity Fund, the Al Mal Saudi Shariah Equity Fund and the Al Mal UAE Equity Fund, recent  winner of the 2013 MENA Fund Manager’s UAE Equity Fund of the Year - 3 Year Performance award.

Its other five funds cover private equity, real estate and fixed income strategies.

Policymaking concerns hold back GCC ratings

Economies in the Gulf Co-operation Council (GCC) remain strong, but their ratings are constrained by structural challenges and policymaking concerns, according to a report from Standard & Poor’s.

The ratings agency said that the Gulf countries will remain ‘insulated’ from global and regional headwinds and forecast 4.6% growth across the GCC in 2013.

Ratings for the six economies were given a stable outlook, but S&P noted weaknesses remain that are constraining their assessments going forward.

“There are still particular shortcomings in the effectiveness and predictability of policymaking in the GCC,” S&P’s credit analyst Dima Jardaneh said.

“Weaknesses include the quality of policy debate; the strength and depth of institutions; transparency of decision-making; data monitoring and reliability of information; legal frameworks and the rule of law; and succession risks.”

The report noted that government debt burdens in the GCC remain at relatively low levels. Bahrain has the largest debt in the region at 34% of GDP, while Qatar’s debts amount to 29% of GDP.

The GCC’s monetary flexibility is weak because shallow local currency debt markets constrain the transmission of policy into the financial markets, S&P added. This can hinder attempts to broaden output away from oil and diversify sources of funding for small and medium sized enterprises.

“Fixed exchange rate regimes, the lack of independent monetary policy, and weak local currency instruments largely constrain the transmission of policy,” said the report. “These attributes and open capital markets largely shape GCC monetary frameworks. Nevertheless, the countries’ open economies with their easy flow of goods and labour have largely underpinned the fixed exchange rate as a credible nominal anchor”.

Subscription extended for Oman’s first Shariah fund

The initial subscription period for Oman-based Vision Investment Services’ new open-ended Shariah compliant investment fund has been extended by one month, Mena FM has learned.

The Vision Al Khair GCC Fund, open to both Omani and non-Omani investors, was due to close to initial subscription applications on 10 February but will instead end on 10 March.

The initial subscription period commenced on 10 January and has been open to individuals, companies, institutions, pension funds, and government organisations.

The new fund, which will have a minimum size of RO 2 million, is Oman’s first Shariah-compliant investment fund and will invest in listed securities in the GCC and Mena region which are compliant with Islamic Shariah principles.

Shariah advisory and audit services provider Shariyah Review Bureau (SRB) has been appointed to ensure the fund’s structure complies with Shariah guidelines.

NBAD seeks to reach Chinese investors with ICBC deal

The National Bank of Abu Dhabi (NBAD) has signed a partnership with ICBC (Asia) Investment Management which will help it reach the growing number of wealthy Chinese investors.

Under the Memorandum of Understanding with ICBCAIM - the overseas investment management arm of the ICBC Group – both firms will jointly facilitate the marketing of their respective investment capabilities through their distribution channels.

NBAD will help market and distribute ICBCAIM’s private equity and fixed income products in the UAE, while ICBCAIM will do the same for NBAD’s Cautious Income Fund and Dividend Leader Fund in Asian markets.

“This partnership allows us to expand the reach of our investment products, especially in Hong Kong which is the centre of Asian commerce and the international gateway to China,” said Alan Durrant, Group Chief Investment Officer and General Manager of NBAD’s Asset Management Group. “NBAD offers a range of innovative and distinguished investment vehicles and we would like to expand our channels of distribution, particularly in the growing markets of Asia. In the past few years, investors have generally been cautious; still, investors’ trust in the market is gradually recovering. Given the diversity of investors’ appetite, we believe the Cautious Income Fund and Dividend Leader Fund, which offer attractive dividends with low level of risk, would be well positioned in Asia.”

ICBC Group is the largest bank in China and the world’s largest bank by market capitalisation. Its asset management arm has over $140 billion in assets under management.

Jack Chang, CEO of ICBC (Asia) Investment Management, added: “ICBC (Asia) Investment Management places high importance in our cooperation with NBAD given the fast growing trade and investment flow between the Gulf region and China. Our parent company ICBC Group is currently expanding its network in the Gulf region and we expect significant increases in capital flow between the two regions.” 

NBAD Asset Management currently has an AUM of around $1.4 billion.

Bahrain economy ‘steadily consolidating’

The Bahrain economy enjoyed a year of steady consolidation in 2012, with its non-oil sector making significant progress, according to the latest Economic Quarterly Report from the Bahrain Economic Development Board (EDB).

First estimates indicated that overall growth for the country in 2012 was 3.9%, building on confirmed figures of 4.4% annualised growth for the first three quarters, said the report. All main sectors of the economy registered positive growth while there has also been a significant increase in lending by Bahraini retail banks.

The strengthening of the short and long-term picture for the Bahraini economy was reflected in the fact that Standard & Poor’s recently revised its outlook on the Kingdom from ‘negative’ to ‘stable’. Growth hopes for 2013 are pinned on large-scale industrial investments and infrastructure spending.

Commenting on the report, Kamal bin Ahmed, Minister of Transportation and Acting Chief Executive of the Bahrain Economic Development Board (EDB), said: “The latest Economic Quarterly report demonstrates that Bahrain’s economy continues to strengthen and after achieving solid growth in 2012, the economy is well-positioned to continue to achieve steady and sustainable expansion in 2013 and beyond.

“In particular, the Kingdom plays an important role as a gateway to the rapidly expanding GCC economies, and the opportunity this offers for investors is demonstrated by the strong performance of key non-oil and gas sectors.”