Jeddah, Asharq Al-Awsat- Dr. Said Al Shaikh, Chief Economist at the National Commercial Bank (NCB) expects Stock market in the Gulf region to continue to accomplish high profits during the year 2006, with corrective steps from time to time. This statement was recently presented at the seminar held in Kuwait under the sponsorship of the National Kuwait Bank, titled “Gulf Stock Market. Boom or Bubble?
Dr.Al Shaikh explained that the fundamental causes of the boom are strong demand from China, India and the US suggesting the outlook for the oil sector and the region’s economies will remain favorable. He also said that the “Stock Market profits of the past two years will be difficult to repeat.”
He predicts that oil prices will come down slightly from his forecast average for Brent crude of $56/B for 2005 to $53/B for 2006, with the Saudi export price forecast at $46/B in 2005 and $44/B in 2006. He also stated that this boom can be distinguished from others in the 1970’s and 1980’s, because unlike those supply stocks, it is demand driven, Dr. Al Shaikh explained, with the growth expected to continue in 2006 and 2007. Then profits reduced for the region for a time. After that, they quickly regained their positions. In the current phase, the rise in oil prices is due to management of revenues and the high dependence on oil. He also explained that the governments of GCC countries have become more sophisticated suggesting that the system is becoming more efficient, in addition, to the dynamics of the private sector in the countries region in comparison to the 1970’s and 1980’s.
Dr. Al Shaikh says that despite their high dependence on oil, agencies have rated the regions countries favorably because of the progress they have made on economic reform and management of revenues. For example, Saudi Arabia announced an expansive budget for 2006, but has also sensibly used much of its windfall revenues for debt reduction. He added that the GCC gross public debt has been marching lower since 2002, with further reductions anticipated.
Despite the rosy economic outlook, Dr. Al Shaikh cautioned that the high share price to earnings (PE) ratios are cause for concern, particularly in Saudi Arabia and the UAE, where the trailing PE (using last four quarters of earnings) has climbed to 33.6 and 31.2 respectively . Dr. Al Shaikh concluded that speeding up the IPO process would reduce market pressure because there would be more shares to absorb liquidity. To reduce pressure on stock markets government should allow companies to develop corporate bonds.
Former US President George Bush, who gave the keynote speech at the symposium, emphasized the importance of regional political stability for economic growth and investors having more trust in GCC stock markets. He said that with $900bn in capitalization and $3bn in daily liquidity, the GCC markets were no longer local and illiquid, but were evolving into more mainstream emerging markets with increased deregulation leanings offering unprecedented opportunities for investors.
Mr. Omar Abdullah, NBK’s Head of Mena Capital Markets stated that 90% of the rise in GCC capital markets to $905bn this year, from $135bn in 2001, had been directly or indirectly due to fundamentals. Of the gain, 38% comes from a climb in operating earnings, 33% from new listings, 19% from operating expansions and 10% from pricing of none core earnings.
He said that most of the growth is private sector driven, unlike in previous periods of expansion in the region. In agreement with Dr. Al Shaikh both see the economic growth as sustainable and suggest that the energy sector investment prospects provide the real long term key. The sector is expected to need investment of $200-500bn to 2030 in order to satisfy global demand, according to the International Energy Agency.