HSBC says buy Gulf stocks as emerging markets fade
Posted on 16 May 2008 with no comments from readers
HSBC flew its Head of Global Emerging Markets Equity Strategy, Dr. John Lomax into Dubai this week for Wealth Management Seminar for its Premier customers. His message was that investing in emerging markets has become far more difficult but that the best opportunities are now in the UAE, Qatar and Saudi Arabia.
Dr Lomax has regularly been ranked among the top three equity analysts in the world for the Europe Middle East and Africa markets. He has a PhD in Econometrics and spent five years in the Bank of England’s Economic Division prior to joining HSBC and was also number two on Merrill Lynch’s top rated European equity strategy team.
Before his seminar in Dubai he talked with me about his enthusiasm for investment in the three Gulf States and the ‘marvelous macroeconomic conditions’ which leave stocks like Emaar Properties the most undervalued stock in the UAE with a 93 per cent undervaluation on his analysis.
Q. You’re a bull on UAE stocks. Why is that? And within UAE stocks where do you think the best value lies?
Right now it is Abu Dhabi and its investment program that is catching my attention. Abu Dhabi is right at the start of an extraordinary adventure while Dubai is a strong but more mature market.
Looking at stocks from the bottom-up companies like Aldar Properties and Sorouh and the Abu Dhabi banks are our top picks. It is a very straightforward play on the government’s infrastructure and investment policy. But we also like Emaar Properties in Dubai for similar reasons.
There is also a reverse correlation with US economic weakness. High oil prices are good for the UAE and bad for the US economy. UAE share prices are also cheap in relation to other emerging markets. Abu Dhabi is very reasonable at a price-to-earnings ratio of 15.7 while Dubai is a little higher at 16.1.
It is the same story when you look at real estate prices in Dubai and Abu Dhabi: $4,000 per square metre is a third or a quarter of the cost of property in London or Tokyo.
Q. But are you not worried that this might be the peak of the commodity cycle, and that the next major move for oil might be lower prices due to a US or even global recession?
Well emerging markets do tend to be around 50 per cent correlated to commodity prices, so we are somewhere near the peak for emerging markets, and that has left us less enthusiastic about markets like Brazil.
Our house view is that oil prices will retreat to $90 and could bottom at $70 a barrel as the world is entering a weak growth cycle. But the Abu Dhabi growth story would still be in tact as the building program will go ahead regardless of a pull back in oil prices.
The Gulf States are going to spend $1.3 trillion over the next five years on infrastructure, a Chinese level of infrastructure thrust. Infrastructure spend will be running at 81 per cent of GDP in the UAE, ahead of Qatar next at 53 per cent. This is not a level of spending I have ever encountered before.
Q. You’re also tipping Qatar and Saudi Arabia as stock markets that investors should be taking seriously. Is this for similar reasons?
I am very optimistic about prospects in Saudi Arabia for three reasons. First I expect foreigners to be able to buy in this market by later this year or early 2009, and that will have a very positive impact as a lot of institutions would like to invest there and can presently only buy mutual funds.
Secondly, population growth is strong with the United Nations predicting a 60 per cent increase by 2030 and that is internal population growth, and not a matter of attracting expatriates like the UAE and Qatar. This seems to me a very solid factor underpinning growth.
And thirdly I like the petrochemical expansion story with Sabic expanding its operations into a global slowdown. This levers the enormous competitive advantage that Sabic has of paying one-tenth of the cost of US feedstock.
As far as Qatar is concerned its economy is growing twice as fast as its closest rival in the Gulf, and on top of that this is the country most likely to revalue its currency independently. That is because Qatar has the highest inflation in the region and the smallest stock of US assets.
Again investing in Qatar is a play on infrastructure investment, particularly in LNG, and we particularly like petrochemicals and the banks.
Q. What are you tipping in emerging markets apart from the Gulf States?
There have been some tremendous inflows into the Gulf States over the past months as investors sought to take advantage of the 2006 sell-offs. But the picture has become more selective around the world.
We have scaled back our commitment to Brazil after a very good run, and in Europe we like Russia and Poland. China has done badly this year but is offering attractive values now while Korea is also interesting.
It is a question of looking more at markets with strong domestic demand than exposure to commodity markets, as we think this is going to be important in a global economic slowdown.
However, we also believe that the US dollar is undervalued and that the US equity market is good value at these levels. Our view is that the US dollar is close to the bottom of its cycle and will improve to $1.35 to the euro by the year end.
But that is also another reason for buying Gulf stocks as these are dollar-denominated assets and will participate in a dollar rally, quite apart from benefiting from negative real interest rates thanks to the dollar peg.
We think the Fed has been ahead of the curve in its interest rate cuts and that the European Central Bank will now have to follow and that will strengthen the dollar. But we are still bearish on the US economy with GDP growth of 1.5 per cent this year and 1.2 per cent in 2009.
