Helped by the recovery in the prices of oil, equities in the Middle East have registered a robust growth. Middle East markets have enjoyed an impressive rally, with the region gaining 17 percent in Q4 2016.
This was by far the strongest performance by any region and allowed the Middle East to post a modestly positive return for 2016 overall, Credit Suisse said in a latest report on Middle East equities released yesterday.
The key driver for this was the strong recovery in both risk appetite (post the US presidential election) and oil prices (particularly after the unexpected Organization of Petroleum Exporting Countries' deal). For most investors, the latter would seem to be the obvious driver for Middle East equities, but as we have highlighted many times in the past, the region has historically not shown any greater correlation to oil prices than the rest of the world due to the lack of energy-related equity listings.
“We forecast economic growth to improve to 2.2 percent in 2017 from 1.4 percent in 2016 for the broader Middle East region, while the GCC is expected to grow 2.3 percent in 2017 from 1.7 percent in 2016. The improvement in growth should be broad based across the major economies,” noted the report. “At the same time, M2 money supply growth has bottomed out for the oil exporting GCC countries, though it remains muted and contractionary for Qatar,” added the report. This improvement comes hand in hand with a reduction in fiscal deficits and a further increase in debt issuance. Fiscal deficits reached unsustainable levels in 2016, but by 2018 we expect to see all major economies in the Middle East rein in their deficits.
During the period of high oil prices from 2010 to 2014, the Middle East had a lower correlation to oil than the global markets. However, this has changed since the oil price crash and its central role in the region’s process of fiscal reform. With oil prices having improved, oil is becoming less important a driver to Middle East equities (correlation is topping out), but we have no doubt that a sharp move in oil prices would once again affect regional equities.
Last but not least, we also highlight expectations of dividend payments as strongly supportive for the regional markets. The majority of Middle East companies make annual dividend payments in calendar Q1 and, as a result, investors tend to position themselves accordingly towards the end of the preceding Q4.
Given the high level of government ownership across the major listed equities in the region, the payout ratio has historically been above the global and emerging market average. After experiencing a contractionary economic environment over the past two years, economic indicators across the Middle East are beginning to show signs of improvement. The oil exporting GCC economies are set to reap the benefits of higher oil prices and progress made on subsidy reform.
