The recovery of the region’s markets will be slower this year and in the year following, said EFG Hermes’ Director of MENA Strategy Simon Kitchen during EFG Hermes 12th One on One Conference on Monday.
Kitchen further projected that stock prices will stand at the same levels after the collapse of Lehman Brothers and the global financial crisis.
Kitchen noted that there is a liquidity death in the region’s markets, leading to fluctuations in the stock markets. He added that companies with strong management, healthy financial listings, and efficient access to capital are best-positioned to profit from the current fluctuations.
Companies that are largely exposed to oil prices, government spending, and sizeable loans will be majorly affected by these fluctuations, added Kitchen. A strategist at EFG Hermes emphasised the importance of searching for alternative sources of energy and reducing support on the region’s oil reserves.
He said stock markets in the Gulf region have been adversely affected by the decline in oil prices, adding that Saudi Arabia and the UAE are currently in the process of selling some of their foreign financial assets to finance the budget deficit, and to maintain government spending in light of the decline in oil prices.
Kitchen said: “Some governments in the region are selling oil at low prices in an attempt to maintain their market shares, such as Saudi Arabia, Iran, and Iraq, with some reducing prices to as low as $20 a barrel.”
He pointed out that the effect on Saudi Arabia is greater than other Gulf countries, given the decrease in oil revenues, which negatively reflected on the government’s spending plans, which have been continuously expanding since 2014. He further mentioned that the building and construction projects in the Saudi Kingdom witnessed a reduction in expenses, in addition to the delay in the execution of contracts and payment of dues, which contributed to reducing companies’ returns.
He thereby projected that the recovery of the region’s markets will be more sluggish during this year and the next.
Kitchen called on Gulf states to take steps towards reducing subsidies, to shift toward renewable energy sources, to apply the value-added tax, and to increase tax rates on alcoholic beverages and cigarettes, noting that Egypt has yet to introduce the value-added tax.
He further highlighted the importance of these taxes to produce revenues for spending on infrastructure projects, in spite of the burden they may represent to citizens.
He explained that Gulf countries can resort to sovereign funds to provide alternate returns for the declining oil revenues, calling on the governments to cut down on the dependence of their main revenues on oil by diversifying their sources of income.
He commended the performance of the banking sector in the UAE, noting that the real estate sector performed better in the past year. He further noted that the UAE market is not as susceptible to global market fluctuations.
He projected that oil prices may recover by the beginning of next year. However, he noted that they are not expected to hit the $60-$70 mark per barrel for a long time.
The Middle East’s shares are currently at the same level they were in the aftermath of the Lehman Brothers’ collapse and the ensuing global financial crisis, measured by their shares’ market prices to their book values, he noted.
EFG Hermes further pointed to the ratio between market prices and book value as the basic standard that should be used in assessment, because estimating profits has become difficult in light of current circumstances.