An Oasis of Investment Opportunities

Central banks in the Gulf region followed the US Federal Reserve in lifting key interest rates by half a percentage point last December. The monetary policy will continue to be a key driver of asset valuation in 2023. Meanwhile, valuations in Saudi Arabia and the UAE have eased substantially over the past quarter with other Gulf countries slightly above average, a positive development according to Credit Suisse.

GCC countries remain resilient relative to other emerging markets (EM) economies amid mounting global uncertainties. The confluence of a materially slowing economy, last year’s surge in inflation and the subsequent tightening of the monetary policy by central banks weakened asset prices across all markets.

Morgan Stanley said that rarely have investors had to grapple with the kind of lessons imparted by an economy just emerging from the pandemic while dealing with an aggressive monetary policy and geopolitical tensions.

The turbulence from 2022 is weighing heavily on the global investment outlook with implications ranging from earnings, valuations, investor sentiment and other key metrics. Further adverse shocks are expected to tip the global economy into recession this year.

However, GCC countries’ growth story is underpinned by high oil prices, robust balance sheets and a steady growth outlook—inflationary pressures and growth prospects remain well-balanced in the region. Credit Suisse projected that oil prices will likely remain above $60 per barrel in 2023 even in the face of a global recession, resulting in manageable fiscal deficits for GCC countries.

EM institutional investors’ exposure to GCC equity markets is projected to grow from the current 2%, driven by a healthy IPO pipeline and the potential for further increases in foreign ownership limits, which will provide a long-term structural bid to GCC equities from foreign investors.

The IPO frenzy is expected to drive a relatively strong performance in UAE and Saudi Arabia equity markets despite equity prices being caught up in global market uncertainty. It will continue a trend that made the Middle East a bright spot in an otherwise gloomy year for new share sales.

GCC currencies’ credible pegging to the US dollar together with transformation programs that are being implemented across the region should also provide strong support to economic activities.

Meanwhile, earnings are expected to plunge this year bringing the stock market down with them. Earnings momentum continues to roll over with the momentum in Saudi Arabia and the UAE remaining well above emerging and developed markets—approximately the same as the rest of the GCC. Credit Suisse said that there are early signs of a ‘trough forming’ in EM earnings momentum while projecting a similar pattern in Saudi Arabia and the UAE.

Global risk appetite has rebounded strongly on the marked equity rally, though the index remains firmly in neutral territory overall with geopolitical risks in Saudi Arabia and the UAE, the Arab World’s biggest economies, seen easing month-on-month this year.

The strategic rivalry between the US and China has intensified over the years as a trade war between the world’s two largest economies has widened to include greater geopolitical tensions as well as a technological and ideological rivalry. The effects of climate change, the shift towards multilateral free trade agreements, cyberattacks and the prolonged pandemic have all compounded global risk.