Positive outlook for Saudi and GCC equities

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Mr Seif-Elnasr expressed concern that the slowdown of growth in demand from the US economy would result in pressure on oil prices, similar to the US recession in 2001, but believed that OPEC would initiate supply cuts to stabilise prices.

Nevertheless, he stated his confidence that any drop in oil production or prices would not impact the region as state budgets are balanced with underlying price assumptions of oil at less than $50.

He opined that the current level of capital expenditure in the GCC could be supported even at $45-50, with any surpluses in excess of this level adding to liquidity or currency reserves.

Favourable demographics, a large domestic market, companies moving up the value chain, the deregulation of industries, focus on education and improved utilization of state wealth were pointed out as factors that are helping the region to capitalize on the economic prosperity and driving growth forward.

Overall, he expressed a bullish outlook given that projects in the region, currently estimated at more than $1.63 trillion, would generate derived business opportunities for businesses and consumers.

Interestingly, Mr Seif-Elnasr said that it would only be a matter of time before an adjustment to the currency peg is made, as governments were likely to opt for this step as a mechanism not only for controlling inflation but also to facilitate their growth and diversification efforts.

In his opinion, all things considered, GCC markets provide investors an interesting investment opportunity with valuation ratios in line with emerging markets, despite having higher levels of profitability.

He pointed out that equities in the region are structurally under-owned with the MSCI Arabia Index estimated to have a potential weightage of 8.7% in the MSCI Emerging Market index, which is larger than India's 6.8%.

In fact for Saudi Arabia, the free float weight of the Kingdom is as high as 56.7% of the MSCI GCC Index - twice the size of Kuwait's weight and over four times larger than the UAE's free float weight.

Saudi equities would on a free float basis represent a potential weight of 4.3% in the MSCI EM index with direct foreign ownership in the Kingdom currently at zero.

He also pointed out that the low foreign investor ownership in GCC markets would prevent markets in the region exhibiting the volatility being seen in other emerging markets such as India and China, driven by fears of a US recession.

In conclusion, Mr. Seif-Elnasr expressed a bullish view on the Saudi, UAE, Kuwait and Qatar markets, while remaining neutral on Bahrain and Oman.