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Middle East Stock Markets Are Set To Soar In 2022

With so much uncertainty regarding the latest wave of the pandemic, investors might want to weatherproof their energy portfolios in case the oil price selloff continues.

The good news: Jason Bouvier, analyst at Scotiabank, says Canadian oil producers are going to be fine, even in the event oil prices drop to US$55 per barrel. In fact, he recently told the Financial Post that at US$80 WTI, Canadian oil companies under Scotiabank coverage were “essentially printing money”.

Bouvier said there was “still ample” free cash flow, even in a scenario of a drop in WTI to US$55.

According to Bouvier, the Canadian oilpatch can cover its capex and dividends for 2022 even if U.S. crude trades as low as US$42.50 per barrel, while average breakeven costs for small and mid-cap companies stand at a slightly higher US$43.50 per barrel.

Bouvier has identified Canadian Natural Resources (NYSE:CNQ), Enerplus Corp. (NYSE:ERF), and Ovintiv Inc. (NYSE:OVV), as the energy companies with the lowest capex breakevens (including hedging gains).

Well, you can now add Gulf stocks to the list of stocks you can count on when the oil price bull runs out of steam.

And the experts are now saying there’s no shortage of catalysts that can keep the momentum going even in lieu of another oil price rally.

Gulf stocks are on track for their best annual performance since 2007, with the region’s best-known benchmark, the MSCI GCC Countries Index, returning 36%, including dividends. That compares favorably with 20% for the MSCI World Index, which tracks developed world markets, and a 1.9% loss for the MSCI Emerging Market index.

The MSCI GCC Countries Index captures large and mid cap representation across 6 Gulf Cooperative Council (GCC) countries, namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. The index includes 68 constituents, covering about 85% of the free float-adjusted market capitalization in each country. As you might suspect, Saudi Arabian companies dominate the index with a 62.8% weighting; UAE is second with 14.3%, while Qatar is third with 11.7%. The odd finding here is that the dominant sector weights are Financials (60.1%), Materials (15.2%), and Communication Services (9.2%), while Energy comes a distant fourth with 5.3%.

Source: MSCI

Positive Catalysts

GCC analysts have told Bloomberg that increased stock market activity in the GCC nations; prospects of a renegotiated Iran nuclear deal, a winding down of the war in Yemen as well as deeper normalization of ties with Israel all make for a healthy backdrop for the GCC stock markets.

A good case in point is Dubai, which has announced plans to list ten state companies, including the main utility Dubai Electricity & Water Authority, in the coming year in a bid to lure investors. Meanwhile, World Cup-host, Qatar, is spending billions of dollars on infrastructure and preparations for the event.

Mohammed Ali Yasin, chief strategy officer at Al Dhabi Capital Ltd, has tapped Dubai and Qatar-listed stocks to lead gains in 2022, followed by Saudi Arabia and Abu Dhabi.

However, the analysts have warned that another GCC rally might fail to materialize due to soaring valuations. The MSCI GCC Countries Combined Index is currently trading at about 16 times expected earnings in the next 12 months, good for a 30% premium to emerging-market stocks compared with an average premium of 13% over the past ten years.

GCC Performance

The Dubai Financial Market General Index (.DFMGI) is up 28.2% YTD, with financial stocks giving the most support. Amanat Holdings (AMANT.DU), an integrated healthcare and education investment company, is up 41.5%, while Dubai Islamic Bank (DISB.DU) has gained 21.5% YTD.

The Qatari index (.QSI) has rallied 12.3% in the year-to-date, with industrial and financial shares supporting the index the most.

Industries Qatar (IQCD.QA), a Qatar-based company that acts as a holding company with operations in petrochemicals, fertilizer, and steel, has climbed 41.0%, while Commercial Bank (COMB.QA) has gained 53.1%.

Saudi Arabia has been another strong performer, with the stock market benchmark index, the Tadawul All Share Index (TASI), climbing 28.0% YTD.

Leading the charge are market heavyweights Al Rajhi Bank (1120.SE) and chemical maker Sahara International Petrochemical (2310.SE), which have advanced 87.8% YTD and 147.2%, respectively.

Surprisingly, oil giant Saudi Aramco (TADAWUL:2222) has been a laggard, with shares flat in the year-to-date.

Bloomberg has reported that Saudi Aramco is in advanced talks to buy a ~20% stake in Reliance Industries’ oil refining and chemicals business for $20B-$25B in shares, with an agreement anticipated in the coming weeks. Based on Aramco’s market valuation of $1.9T, a deal would give the Indian company a ~1% stake in the world’s biggest energy company.

Meanwhile, Abu Dhabi’s stock market index, ADSM All Shares Index (.ADI), has emerged as the GCC class valedictorian after climbing 74.2% YTD.

First, Abu Dhabi Bank (FAB.AD) has gained 35.9% YTD; Emirates Telecommunications Group (ETISALAT.AD) is up 51.1%, while Dana Gas (DANA.AD), has climbed 50.7% over the timeframe.

The United Arab Emirates central bank (CBUAE) announced in September that it would start to gradually withdraw stimulus measures introduced last year to mitigate the economic impact of the COVID-19 pandemic. However, the bank said lowered reserve requirements for banks would remain unchanged, meaning the UAE economy is not totally out of the woods yet.

By Alex Kimani for Oilprice.com

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