Kuwait economy expected to grow at around 6.2% for 2012

Global Macro
Following the re-election of Barack Obama as the US President, there is a sense of relief that the global economy will not be subject to major policy shocks that a change in the leadership could have triggered. Nevertheless, the IMF expects world output to decelerate from 3.8% in 2011 to 3.3% in 2012 as Advanced economies decelerate from 1.6% to 1.3%. The Euro-area is likely to contract by 0.4% for 2012, before witnessing a flat or anemic growth of 0.1% in 2013. This will be dependent on policy efforts exerted at the national and regional levels to retire public debt and  embark on credible structural adjustments. Emerging economies are likely to continue on a positive nominal growth path as China is forecast to grow at 7.5%, India at 5.5% Russia at 3.6% and Brazil at 1.5%.

Forecast inflation rates for 2012 remain beneficial to growth in Advanced economies, at 1.8% for the G-7 on average and flat in Japan. The rate will be at 2.1% and 2.5% in the US and the Euro-area, slightly above the Fed and the ECB implicit target of 2.0%. In Emerging economies, inflation is expected to maintain an upward trajectory, as forecasts place it at 7.5% for India, at around 5.5% for Brazil and Russia, with the exception of China, where it remain conducive to growth at 2.8%.

In this environment of slowing recovery, deleveraging and deflationary pressures in Advanced economies, monetary policy remains highly accommodative through further quantitative easing. The Bank of Japan expanded its asset purchase program in October by JPY 11trn, for the second time in two months, following an additional JPY 10trn in September,  while keeping its credit loan program at JPY 25trn.
In India, the Reserve Bank cut its Cash Reserve Ratio by 25bps to 4.25%, with the intent of raising domestic liquidity by about USD 3.2bn, while leaving interest rates unchanged to fight elevated inflation. Short term interest rates are expected to remain low till the year-end and conducive to short term borrowing with 3-months LIBOR on US, Euro-area and UK deposits ranging between 0.40%, 0.75% and 0.50%.

GCC Macro

Higher government spending by most oil exporters has supported robust economic growth, which is expected to pick up speed from about 4% in 2011 to 6.5% in 2012. GIC forecasts that economic performance in the GCC will grow at a combined overall rate of 6.3% for 2012, and that Saudi Arabia and Kuwait will grow at around 6.2%, with Qatar at 8.2%, alongside more moderate growth of 4.0% for the UAE, 5.2% for Oman and 3.5% for Bahrain.
With the exception of Bahrain, all other GCC economies will realize positive fiscal surpluses that range between 15% for Saudi Arabia and 25% for Kuwait. However, potential for possible spillovers from the EU crisis remain, mainly through lower oil prices that could extensively impact the growth prospect of the GCC economies. Recent increases in spending, largely through social measures and benefits are not sustainable, and the IMF has warned that surpluses could turn to deficits within 5 years, if spending cuts are not imposed.
All GCC countries are also expected to post trade surpluses which should add to their accumulations of savings and foreign reserves. Trade in the GCC has been thriving thanks to exports of Oil and related exports and to the import of a large number of products, including most of the food that is consumed in the region. Among GCC economies, Dubai in particular, has become an integral link in the regional as well as global food chain, as the Emirate is the world’s third-largest re-exporter of food, with most of its trade flowing through to other countries in the region, as well as to Asia and Africa. 

GCC Equity Markets

GCC equity markets remained subdued in the build-up to the US elections and signs of a genuine solution among European policy makers to stifle the debt crisis.  The MSCI World Index was down -0.76% for the month, with European markets in the green while US equities retreated. Emerging markets continued their slowdown as waning demand from China and the other BRIC nations hurt growth. The MSCI EM Index was down -0.73% MTD as the constituent nations await sustained recovery from the Developed countries of the world. 
Overall, GCC equities experienced differing results during the month of October as quarterly results came to the fore. The S&P GCC Composite shed -0.48% for the month on the back of persistent below par performance from the region’s powerhouse economy, Saudi Arabia. Dubai was the top performing market with neighboring Abu Dhabi a close second, as the UAE continued to benefit from its status as a regional safe haven and became the go-to spot for the Eid holidays.  
Crude oil plunged on the back of uncertain global demand and the effects caused by hurricane Sandy.  WTI crude shed -6.83% while Brent crude slid -2.58%.  A weak set of Q3 earnings, coupled with forecasted subdued demand for oil has put the Saudi Tadawul index under increased scrutiny, and it closed down -0.71% for the month as the two heavyweight sectors, Banking and Petrochemicals, shed -1.32% and -2.80% respectively.  No visible catalysts are seen to help the index rebound in Q4. 

In the UAE, Dubai’s DFM Index and Abu Dhabi’s ADSM Index gained +2.59% and +2.57% respectively, making them the best performing markets in the region.  Dubai’s positive performance was helped by many sectors, with Telecom up +5.11%, while Investment & Financial Services soared +8.47%.  The heavyweight Real Estate sector also gained a significant +2.40%.  In Abu Dhabi, the Real Estate and Financial Services & Investments sectors propped up the index, as they both soared +9.52% and +5.56% respectively. 
In Kuwait, the KWSE (Weighted) index fell -2.66%, after what has been a brief rally reacting to government support of the stock market.  However, renewed political issues and a mass protest against the Emir have made the index retreat as Kuwait’s economic prospects looks as bleak as ever.  Sectors were mainly all in the red, most notably the Telecom and Financial Services sectors, which both fell -4.19% and -3.77% respectively. Kuwait’s KWSE (Price) Index was down -3.61%, making Kuwait the worst performing market in the region. 

In Qatar, the QE Index was up marginally by +0.43%.  This slight increase was due to the positive performance of the Industrials sector, which gained +6.17% for the month, offsetting the tepid performance of the Banking sector, which shed -1.47%. 
Oman’s MSM Index had a solid performance, gaining +2.27% as all sectors were up across the board.  The Services and Industrials sectors were up +3.37% and +2.00% respectively, while the heavyweight Banking sector was up marginally by +0.63%. 
Bahrain’s BSE Index was down -2.71% for the month,  as the important Banking sector slid -1.35%. Moreover, the Industries sector plunged -7.54% to bring the index down. Bahrain continues to struggle to find its feet after more than a year of political unrest.
GCC stock markets have been tepid as of late, as Q3 earnings were not very impressive for the heavyweight sectors in the region’s stalwart economy, Saudi Arabia. A slowdown in China has affected the Petrochemicals sector greatly while continued pessimism over the recovery in the US coupled with the European debt crisis has investors remaining cautious.  

Moreover, the Banking sector in Saudi is also under pressure after subdued results for Q3 and lack of catalysts heading into the end of the year.  A pessimistic view on oil prices have taken a toll on the region, as demand for the coming year seems to be fading with the global economic recovery continuing to stutter.  In the UAE, the Real Estate sector has edged up nicely as Dubai returns to the days of pre-crisis levels, and the Emirate has emerged as a safe haven amidst the political turmoil in the region.  After a brief rally, the Kuwaiti market has plunged again and riots and protests have put the nation in the limelight once more as the Emir struggles to please the local populous in a politically embroiled nation.  

GCC Credit Markets

Globally, we saw slight improvement in macroeconomic data. UK reported a GDP growth of 1% in the third quarter, which was strongest since the financial crisis and officially ended the double dip recession. US economic growth rose in the third quarter to reach an annualized rate of 2%, higher than expected, fueled by rising consumer confidence,  fledgling recovery in the housing market and an increase in government spending. However, as per the latest earning data of S&P companies, the earning cycle has turned weak in US. In Asia Pacific, the worst of declines may be moderating as economies across Asia reported better set of numbers.

GCC markets continued its upward march, managing to close at highs. Spreads tightened significantly during the month. The HSBC Nasdaq-Dubai GCC USD Sukuk/Bond TR Index (GCCB) rose m-o-m, to close at 156.03 from 153.73 and spreads tightened by 32bps, yielding 3.35%. The HSBC Nasdaq-Dubai USD Sukuk TR Index (SKBI) increased m-o-m from 143.68 to 145.02, while the HSBC Nasdaq-Dubai GCC Conventional USD Bond TR Index (GCBI) traded in a range of 157-160. HSBC Nasdaq-Dubai GCC Conventional USD Bond TR Index (+1.32%) outperformed the JPM EM Bond Index (+0.47%). In the CDS Sovereign space, tightening of spreads was witnessed across the space except for Bahrain. Dubai was the best performer with spreads tightening by 45bps (-15.8%) followed by Saudi 8bps (-8.9%). Bahrain widened marginally 3bps (+1.2%).
Overall, the Primary market is still not witnessing huge supply as anticipated, which is helping the credit spreads to tighten. However, the month witnessed several issues primarily by Investment Grade banks out of Qatar and Abu Dhabi. All the issues were several times oversubscribed, signaling a good appetite for quality issuer. FGB was first to hit the market with a USD650mn 5Y bond at MS+210bps. This was followed by USD750mn 5Y Sukuk by QIB at MS+175bps. QIIB tap the market with its maiden Sukuk issuance of 5Y USD700mn priced at MS+190bps. Investors was  last in the line with 5Y USD250mn bond issuance yielding in the low 8% area.

Short Term Outlook - The GCC market had a sharp run up during YTD’12 supported by strong fundamentals and technicals. Now the market is looking bit stretched with rich valuations. Despite the tight and tired market, the search for yield in a low yield environment and strong flow of funds into fixed income will aid the market. The primary market is also expected to provide support, given a lack of supply and strong demand resulting in spreads tightening. We recommend a very cautious approach with defensive positioning and advise against chasing the market. Overall, in ST, we expect the market to consolidate.
Mid Term-Long Term Outlook - GCC market is expected to  perform well given the supportive macro-fundamentals and positive news flow from international space primarily return to growth trajectory and continued monetary expansionary policies by major economies. GCC credit still continues to trade cheap when compared to its rating class.  It also benefits from a very supportive investor base, with Middle East investors having acquired around 50% of the total GCC issuance so far this year.

Overall, we recommend Investment Grade and defensive credit primarily out of Qatar, Saudi and Abu Dhabi over High Volatility, till the global uncertainty recedes. We also like Quasi Sovereign names especially in Abu Dhabi, given the attractive spread pick up over sovereign. Given the run up in the far end of the curve, global uncertainty and volatility in UST, we suggest  underweighting duration. Spread curves for some of the Investment grade names are trading flat, providing an opportunity for long short strategies to take advantage of possible curve steepening.  We also advise to selectively look at High Volatility space with strong franchise value, profitable business model and stable cash flow. We like Dubai names in the space. We remain neutral financials given the tight spreads, expected supply and sharp run up.

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