Dividend yields will be a more important driver of returns in Qatar this year and many foreign investors seek to enhance exposure, ahead of its emerging market inclusion, according to Credit Suisse.
“At 4.5%, Qatar offers yields well above both regional and international averages. We believe dividend yields will be a more important driver of returns in Qatar in 2014, it said in a report.
With high levels of government ownership and a pegged currency, the yields carry limited risk, Credit Suisse viewed.
With most companies paying out dividends toward the end of first quarter this year, it said high-yield names should be well supported for the next few months.
“To a lesser extent, we believe some investors will also seek to increase exposure to Qatar ahead of its emerging market inclusion, particularly as the market substantially underperformed the UAE last year,” it said.
Qatar offers the highest gross domestic product growth rate in the region (and among the highest globally), and valuation multiples are at a 20% discount to MSCI World.
“Despite this, we believe concerns related to the timing of the 2022 World Cup will be a headwind. Indeed, we believe the market will be unwilling to pay for growth until significant World Cup expenditure begins in 2015 onward,” it said.
Asserting that its favoured countries remain Qatar and Saudi Arabia, Credit Suisse said, “We see a risk of momentum slowing down in the first half as the positive impact of UAE and Qatar entering the MSCI emerging market may be less than anticipated.”
On the prospects of Gulf markets, it expects to record solid returns in 2014, driven primarily by two supportive factors: rising earnings expectations and robust investor appetite.
“We expect the Gulf’s valuation discount versus the MSCI World to narrow further, with potential for a modest valuation premium to arise, while earnings upgrades, in aggregate, could continue at the current pace. As a result, we estimate that the Gulf region could generate returns of approximately 15% over the year,” it said.
By sector, it expects greater earnings revisions in petrochemicals than financials, as the former benefits from an improvement in the global macro environment.
While fundamentals continue to improve in the financials sector, much of the reduction in provisioning is now complete, according to the report. “We see a risk of momentum in Qatar and UAE declining toward first half of 2014. There appear to be expectations of a marked pick-up in trading activity once both markets officially enter the MSCI emerging market index as institutional investors are “forced” into the market,” it said.
Active investors are unlikely to reduce or eliminate their UAE and Qatar under-weights when valuations are at a rich premium to the broader emerging market universe, according to it.
Passive tracker funds are not constrained by valuations, but many passive funds could bypass the two markets entirely since the combined weight of both markets could be just 1%, the report said.
Credit Suisse also said it expects to see a steady improvement in initial public offers in the UAE and Qatar, albeit with a slow start.
This is also underscored by government statements that suggest increased part-privatisation in order to take advantage of the emerging market upgrade, it added.
Riding on the success of Mesaieed Petrochemical Holding Company, Qatar’s yet another state-owned entity Mowasalat is also planning to tap the market, HE the Transport Minister Jassim Seif Ahmed al-Sulaiti recently informed the cabinet. Gulf Times