MENA Strategy Macro focus: strong top-down, improving bottom-up

Published October 5th, 2009 - 09:50 GMT

The improvement in the global backdrop, higher oil prices and recovering credit market have all strengthened the case for GCC recovery. As the seasonality has turned favourable and the region specific concerns have started to ease, the positive global backdrop is likely to become the dominant theme for the region. We still favour UAE and Saudi, while we believe Egypt may face some headwinds as higher commodity prices hurt both the fiscal balance and inflation outlook.

Commodity focus: OPEC - brothers in arms... or not?
While OPEC members could be pleased with the attained results, the path ahead will not be easy. The cartel has lost a significant market share in global crude production in the past year, mostly to Russia. Meanwhile, a warm winter could pose downside risks to oil prices given the high distillate stocks. With many global oil producers free-riding on OPEC, any additional supply cuts may not come easy. We currently see oil prices averaging US$64/bbl in Q409 and US$82/bbl in Q410.

Equity focus: bullish on improving confidence and growth
While drawn to the top down allure of UAE and Saudi Arabia, we also see opportunity in regional laggards Qatar and Egypt. Indeed, the recent UAE rally warrants casting a broader net in order to seek performance. Our top picks in the region are Almarai, ANB, DFM, EFG-Hermes, OCI, Orascom Telecom and QNB.

Credit focus: confidence improves but test for Dubai ahead
The confidence in the GCC credit markets has significantly improved and spreads are no longer pricing in a worst case scenario. Activity in the new issue bond market has been particularly strong, reflecting high cash levels and credit markets' increased comfort with associated risks. Our current recommendations are OW-70% (Aldar), OW-30% (DPW, TAQA), and UW-30% (DUBAIH).

Structured finance: strong activity in the Sukuk market
Primary activity in the Sukuk market has been strong so far this year. Ijarah, Murabahah and Musharakah have been the main types of structures, accounting for almost 80% of the total issuance.

FX & debt strategy: no major change in FX policy
We do not foresee any changes in the exchange rate regime in the GCC nor a break of the dollar peg, as the depreciation pressures on the peg have disappeared. Meanwhile, we remain bullish on the sovereign EXD given the region's status as a growth and commodity play. Against this, we have an overweight position on Qatar and Bahrain in the long-only portfolio, while expecting Iraq to continue to outperform the market until year-end.

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