08 April 2012
With Gulf economies poised for growth on the back of strong macroeconomic policies, regional stock markets are also set for growth.

The two most liquid GCC markets - Dubai and Saudi Arabia - are both up well over 20% since the start of the year, with the Egyptian market also rising an astonishing 33%.

Opportunities abound in the MENA equity universe, but BAML is sticking with the slightly more obvious Saudi markets, is market weight in the UAE and Qatar and underweight in Egypt.

Overweight Saudi. BAML continues to see the greatest upside potential in the Saudi equity markets, driven by higher GDP growth and improved liquidity.

"We find valuations provide good upside potential despite the recent surge in market volumes, fuelled partially by increased retail activity," wrote Stephen Pettyfer, analyst at BAML in a note to clients.

"While forecast market coverage EPS growth is weighed down by a cyclical downturn in the petrochemical sector, we still find 11% EPS growth one of the strongest in the region."

The bank is less bullish on Qatar, which is up a mere 0.60% this year, after being the top perfoming MENA market last year.

"In our view, while we like the strong dividend support, but see limited catalysts for a market re-rating particularly against a constructive global backdrop," says BAML.

However, Egypt which has risen 33% and is the region's best performer, may not see further upside, according to BAML.

SELLING REAL ESTATE
Meanwhile, a strong start to the year from the region's most levered group of companies leaves BAML sector analysts struggling to see further upside, particularly in the property sector. BAML has a marketweight stance on the UAE.

While BAML remains upbeat on sectors such as financials and telecoms, it remains bearish on real estate stocks, especially after they ran up 44% year-to-date; little further upside remains as fundamentals have not materially approved.

The bank also recently downgraded Sorouh Properties from buy to neutral and expects 10% excess real estate supply in Abu Dhabi.

However, Dubai residential unit sales market remains stable, with capital values rising 2% in the quarter.

Construction-related companies are another matter, especially with the Saudi project pipeline worth USD401 billion under way. Drake & Scull and Al Khodairi, are BAML's top construction picks.

In the petrochemicals space, the bank is 'cautiously optimistic' with heavyweight Sabic as its top pick. Other pick include Yansab, but the bank is neutral on Industries Qatar (IQCD) and expects SAFCO to underperform.

BANKS ARE VALUED HIGHER THAN PEERS
Gulf banks now trade higher than other emerging market banks, but remain at a discount to their historical multiples, even as earnings visibility has improved. Major improvement in credit growth could lead to a re-rating as well.

Here are BAML's top banking picks:

Samba: Top tier Saudi bank with 18% T1 CAR with the potential to aggressively expand lending. BAML expects Samba's pre-provision profit growth to shift from -8% in 2011E to 13% in 2012, providing room for re-rating. It is the most discounted Saudi bank in our coverage at 1.6x and 9.1x 2013E PBV and PE, respectively, says the bank.

Al Rajhi: "While its valuation is demanding at 2013E PE of 12.7x, its currently trades at a 16% discount to its 3-year historic multiple and its premium vs. the Saudi market and banking sector is around all time lows."

First Gulf Bank: Singled out as a great proxy to UAE recovery with improved asset quality and plenty of room for capital release through higher dividends or a share buyback program.

Commercialbank: The Qatari bank currently offering the highest dividend yield among BAML's MENA banks universe at 8% while maintaining CAR of 18% and 14% 3-year EPS CAGR.

BULLISH ON UAE CORPORATE BONDS
It has been a busy time for Gulf corporates this year, with nearly USD8-billion
raised this year, with more expected.

Qatar Islamic Bank, Qatar International Islamic Bank (QIIC), Mubadala, UASC, Kingdom Holding, Qatar Petroleum, Qatar Electricity and Water Co, and IQCD have also signalled their desire to come to the market indicated their intentions to come to the market, but the supply is not alarming given their significant sponsorhip from the local investor base.

BAML remains rather bullish on UAE corporate bonds. They had outperformed other emerging markets in the second half of 2011 with returns averaging 7%, but have not been able to repeat that performance.

"We are constructive on UAE corporates going in to the second quarter. Year to date, these issuers have lagged others in emerging EMEA but we think this could reverse. Our top picks are IPIC, DEWA, NBAD and FGB," notes analyst Tolu Alamutu, Kay Hope and Ali Dhaloomal in a report.

"Performance at most UAE banks should remain strong. We believe FGB and NBAD are likely to outperform. Leverage multiples should improve at TAQA and DP World."

© alifarabia.com 2012