The second panel at the Investment Conference 2024 hosted by Kamco Invest and @BurganBankChannel. The panel was moderated by Faisal Al Othman, Director of Equity & Fixed Income, Kamco Invest and panelists included Abdullah AlSharekh, Managing Director of Markets and Investment Banking at Kamco Invest & Board Member at Burgan Bank, Mazen Alsudairi - Head of Research, Al-Rajhi Capital, and Ankur Khetawat - SVP Equity & Fixed Income, Kamco Invest

Faisal AlOthman initiated the second panel discussion with a general assessment of regional equity markets. He raised questions regarding the catalysts determined to be drivers of performance for 2024, interest rates outlook and market pricing in expectations of rate cuts, participation of foreign investors in regional capital markets, and the sensitivity of regional markets to geopolitical events occurring in the area.

Ankur Khetawat noted that, “In 2024, the important drivers of GCC markets will continue to be macro factors like interest rates and oil prices. Additionally, we note that the non-oil GDP growth prospects for GCC countries remain robust, in contrast to other developed economies. Overall economic growth in the region is expected to continue to be supported by stable oil prices and recent expansion plans in both the hydrocarbon and non-hydrocarbon sectors.”

In terms of interest rates and the market pricing in the expectations of interest rate cuts this year, possibly three times, and the effects on certain segments of the equity markets regionally, the panel agreed that the Fed rate cut will certainly have a positive impact on regional markets. To some extent, the initial rate increases worked out favorably for the GCC markets as the real interest rates were in negative territory for a long period. However, the aggressive stance of the Fed has put the real interest rates in positive territory, generally impacting the investment environment adversely.

Mazen Alsudairi added, “If you see the earnings yields and dividend yields of the GCC markets, they are currently near or below the overall bond yields, which has reduced the attractiveness of the markets. Also, as the money is more expensive, it has implications for the cost of equity calculations for the stocks. Finally, there has been a notable increase in the cost of funds for banks, which has impacted the net interest margins in the banking sector.”

On the participation of foreign investors in regional capital markets, Abdulla AlSharekh responded, “In 2023, the weight of the GCC region in the MSCI Emerging Markets indices experienced significant growth, increasing from 1.2% in 2017 to approximately 7.1%. This GCC weight to the index is expected to continue, driven by the relaxation of foreign ownership limits and the introduction of new listings.”

He added, “The foreign portfolio investment flows into the GCC region demonstrated positive trends, resulting in net inflows during 2023. Notably, foreign ownership in regional equities surpassed 10%, excluding Saudi Aramco. This favorable momentum is expected to persist, leading to increased listings and the development of new investment products.”

When the panel was asked about the impact of geopolitical events on the sensitivity of regional markets, the panelists acknowledged that markets are not immune to such events, evidenced by an initial sell-off in response to geopolitical tensions. The geopolitical outlook in 2024 presents a complex interplay of opportunities and challenges for the GCC. The region is navigating a global economic slowdown and the ongoing conflict in the Middle East. This is expected to lead to a short-term increase in the equity risk premium for GCC and regional equities. The entire panel agreed that on a positive note, there has been a marked improvement in intra-GCC relations, and the GCC's global standing has also seen a significant uptick, attributable to its significance as a dependable energy supplier. Looking forward, the GCC is poised to further solidify its international position through upcoming events such as the 2024 WTO Ministerial Conference in the UAE, Expo 2030, and potentially the 2034 FIFA World Cup in Saudi Arabia.

@TheEconomistIntelligenceUnit