Short-term pain, long term growth story, SICO's GCC outlook

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This is Securities & Investment Company (SICO)'s view of the GCC's investment outlook, which it will share with investors at the Fund Forum Middle East that will be held on 1-3 December in Bahrain.

'The GCC has witnessed ample evidence over the five months that its financial markets and economies are very much a part of the global economy. However, we believe that although the region may yet experience further pressure, even pain, in the short term, the medium to long-term growth story remains robust. The economic structure of the region is fundamentally different to those of developed and other emerging markets. Although oil prices have fallen by over $100 a barrel over the past four months, with prices hovering at around $45-60 a barrel, even so we believe that GCC economies have sufficient cushions to sustain economic growth, albeit constrained until the world economy picks up. With increasing revenues from the non-oil sectors, together with the wealth generated by sovereign investments, the region's economies are set for continued strong but moderating growth,'

said Anthony Mallis, CEO, SICO.

SICO has developed market-leading investment insight since its inception in 1995 by offering clients proprietary research based advice. With this deep understanding for GCC regional investment opportunities, SICO has developed an investment business that has consistently delivered strong growth and value for its clients.

At Fund Forum Middle East, SICO will outline its views on the main factors that will affect economic growth across the GCC. The US Fed is very unlikely to raise rates in the near future, meaning that regional real interest rates will remain in negative territory as they remain pegged to the US dollar. Conversely, liquidity has tightened and is impacting the wider GCC economy with the cost of lending having substantially increased. SICO believes this to be a positive for the economy over the medium-term as constrained credit growth will help to cool regional economies and contribute to reducing inflationary pressures.

Inflation, fuelled by both supply and demand factors, has been a key and troubling issue for the region for the past five years. SICO believes that the recent decline in commodity prices, the strengthening of the US dollar and increases in interbank rates should help ease inflationary pressures. The region will continue to experience fiscal and current account surpluses, although reducing from present levels and derived from the previous five years' oil revenue windfalls (and foreseeable modest oil prices), which enabled GCC economies to build foreign exchange reserves, reduce government debt levels and invest in long-term projects to help diversify their economies.

SICO views the decline in the price of oil from its highs of $145 a barrel, to current levels of $45-60 to be a positive for the global economy and will thus be beneficial to the GCC economy on the longer run. SICO expects oil prices to dip temporarily below the breakeven level for most GCC budgets.

Sovereign Wealth Funds, which, to date have invested their oil derived surpluses into Western markets, are increasingly turning their attention to regional investment opportunities.
The region has a significant pipeline of investments, measured at $2.2 trillion at the end of September 2008.

SICO estimates $500bn worth of these projects are already underway and although part of the planned investment may be postponed or cancelled, SICO views this as a positive for the region as it will help to reduce inflationary stress. SICO expects the strong growth of real estate to finally abate in 3Q08, as supply catches up with market demand, although markets such as Abu Dhabi, Qatar and Saudi Arabia will remain strong over the long-term. SICO also sees consolidation driven merger and acquisition activity across the region in the face of increasing competition

Anthony Mallis , CEO, SICO, added, 'Like the rest of the world, we will have some short-term challenges to face but the region will come out of this phase much the stronger for it. The GCC economies will be among the few that will grow during 2009 and 2010, albeit at a slower pace than expected. The region's equity markets still offer attractive long-term returns, coupled with strong corporate earnings growth. With local stock markets still attractively valued compared to other markets such as the US, Europe or Japan. Clearly, risks remain in the form of oil prices, the future value and yield of regional real estate, inflation, liquidity, geopolitical tensions and the regulatory environment, but, we believe that the fundamentals of the GCC's economy mean that it will continue to deliver strong growth.'

Securities & Investment Company is a wholesale bank offering a selective range of investment banking services, including asset management, brokerage, corporate finance and market-making, on a regional basis and with a particular emphasis on Bahrain. SICO was incorporated in Bahrain in 1995 and holds a banking license from the Central Bank of Bahrain.

As of June 30, 2008, SICO reported total assets of BD93m, with shareholders' equity of BD61.3m. SICO's shares have been listed on the Bahrain Stock Exchange since May 2003. Securities & Investment Company was the first 'closed' company to list on the exchange.