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GCC equities: Managing risks to attract investors

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By Amélie Thévenet, Fund Manager, Emerging Markets, Jupiter Asset Management

Monday 15, October 2018 BY ANNUAR NABILAH

GCC markets have attracted the attention of emerging market (EM) investors. Some markets, particularly Saudi Arabia and Qatar, are emerging as a safe-haven for EM investors. Exposure to GCC equities is diversifying risks associated with emerging market strategies, and regional  markets can continue to attract investors by paying close attention to risk while focusing on investor education.  

Compelling market capitalisation

Emerging market investors have long recognised the region’s potential.Countries in MENA—and in particular the GCC—are undergoing significant, wide-reaching reforms aimed at diversifying their economies. In Saudi Arabia alone, the transformation initiated by Crown Prince Mohammed bin Salman   under the Vision 2030 umbrella, has ignited economic growth and has had   a positive impact on markets. This year, the Kingdom achieved inclusion in the MSCI Emerging Market Index—the most widely followed of all EM indices—which is likely to attract foreign inflows of as  much as $45 billion.  

The Saudi Stock Exchange, Tadawul’s market capitalisation stands at around $503 billion, and with a P/E of 16.75x makes it a compelling prospect for investors around the world. Other regional markets including the Qatar Exchange ($151 billion) and Kuwait Bourse ($85 billion) have earned their place on the radar of  investors, albeit to a lesser degree. While   investors remain interested in regional   capital markets, liquidity concerns, macroeconomic and geopolitical risks, and corporate governance issues must be better managed if issuers are to maintain investor confidence.  

Managing risks and educating investors

Geopolitical and security risks are front of mind for any international investor looking at emerging markets. When making investment calls, a fund manager will look at the equity story of companies as well as their market fundamentals. To satisfy investors and attract capital, MENA corporates need to integrate a range of investor education tools across their communications, to accurately and   transparently convey their equity story.  In the GCC and wider Middle East, a greater focus on Environmental, Social and Governance (ESG) disclosures will   enable investors to understand the   risks that exist for a business.

Research   shows that ESG integration can help achieve better operating and financial performance. So, corporates in the region should take heed, and go to greater lengths to actively communicate ESG integration into the business model. Tools including sustainability reports and   integrated annual reports will enable investors to better understand businesses in the region and put perceived risks into their proper context. The role of Investor Relations (IR) teams is increasingly important. More and more, investors are contacting companies directly, rather than through brokers, to understand a business and its associated risks. IR teams must make themselves as available as they can, and work to build trust with the investor community.  

Fundamentals always come through, be selective

While the GCC equities market presents  considerable opportunity to global  investors, they will need to allocate  and manage their capital wisely, while actively navigating a volatile investment landscape. Investors must be selective and carefully assess risk to capture   opportunities in the market. Sectors showing attractive upside   potential in GCC markets currently include retail, aviation, telecoms, and healthcare. Healthcare represents a particularly interesting opportunity, because of structural growth, increased focus on government spending, and a high prevalence of chronic diseases. GCC healthcare spending is projected to reach $104.6 billion in 2022—at a CAGR of 6.6 per cent between 2017 and 2022.

Furthermore, 73 per cent of   deaths across the region are a result of  non-communicable, and often chronic, diseases. This is a sector to watch. As GCC economies diversify their   revenues and undergo material structural  change, investors will look for positive changes in stocks at company, industry  and country level. With rapidly-moving  economic reforms, and recent index inclusions and watch list additions, the   region is in the eye of international   investors now more than ever. It is no accident that at the half-year mark of  2018, the Tadawul All Shares Index was  up 15 per cent, as compared to the MSCI EM Index, which was down two per cent.  International inflows aren’t likely to dry up   any time soon, but issuers must realise  that while investors will look at macrotrends, they will place particular focus on  company and industry fundamentals to  inform allocation.  

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