Sico cautiously optimistic for the GCC in 2009

This is the conclusion of its 2009 GCC Markets Outlook issued today. SICO's position is based on its assessment that markets will react positively once we see more global economic clarity, which will in turn give clarity on oil price direction and range. Sico expects oil prices to be under severe stress during 1Q09, gradually increasing over the course of the year to an average of about USD40-50/bbl (Nymex crude) for 2009.

Sico believes the major factors that will dictate the performance of GCC markets during 2009 will be greater clarity on real estate prices in Dubai and the impact of devaluing regional real estate on the GCC financial sector.

The negative impact of foreign funds outflow upon GCC markets witnessed in 2008 is less likely to be repeated in 2009 as the foreign ownership levels have fallen to less significant levels. Sico sees mutual funds investing in the region to become a key trigger in the revival of GCC markets' fortunes once uncertainty subsides. As per Sico estimates these funds are holding about USD 10-15 bn cash, roughly 6-10% of the GCC market's free float market cap, providing them significant buying power.

Sico sees pockets of value but also increasing concerns in certain sectors of the markets as we enter 2009. On a country basis, Sico feels that Saudi Arabia and Qatar are best positioned to support their economies amidst global economic crisis. Oman should benefit from being a relatively closed economy, while Kuwait could be bruised by concerns over its financial sector. Bahrain is expected to grow at a moderate pace benefiting from its balanced economic structure, despite its banking, oil and manufacturing sectors being affected by the global economic downturn.

The UAE's outlook is weighed down by concerns over its real estate market and the debt levels of Dubai. The report recommends investors to focus towards sectors, rather than countries as a whole, which provide higher revenue and earning visibility.

Sico recommends telecoms as the most attractive sector during 2009. Telecom stocks offer large scale, diversified operations which generate high revenues and offer good earnings visibility.

Sico underlines that we are currently undergoing a cyclical downturn in the global petrochemical industry which has worsened due to the global recession and a significant liquidity crunch. Margin pressure is likely to linger in 1H09, but, Sico expects margins for GCC petrochemical companies to rebound dramatically in 2H09 from the current 5 year lows, driven by SICO's expectations of a recovery in oil prices and some signs of global economic recovery.

Sico sees a modest recovery in banking sector stocks over the course of the year, especially in the big players which are in a relatively better position to weather the current crisis. The recovery will mostly be on the back of attractive prices, as net profits for most banks are likely to decline in 2009. Sico also expects a slowdown in asset growth from the 20-25% level, to more moderate levels in the year. Sico also believes that the growth of Islamic Banking assets will also moderate in 2009, due to the global financial turmoil, continued negative sentiment, the lack of liquidity and exposure to real estate and equity markets.

Sico expects 2009 to be a challenging year for real estate companies, with consolidation of operations expected during the year. Companies which significantly change their strategies, ambitions and cost structures to cope with the ongoing recessionary environment will continue to remain in the market. Sico continues to feel that the demand for housing in most GCC countries will remain strong in the long run. However, over the short-term, investors will not be purchasing in these depressed market conditions. This is due to increased down-payment requirements, liquidity constraints, job insecurity and an increased propensity to save, coupled to personal fixed cost reductions.