Strategy Note /

GCC: The Gulf is not a safe haven unless (at least) oil prices recover

  • GCC equities are back to historic low valuation points but this is not a trigger to revisit them unless you assume...

  • ...An end to the oil war or the Covid-19 war soon; otherwise expect more bad news to continue, for example...

  • ... Kuwait and Oman credit rating cuts, Dubai's Emirates bailout and Expo 2020 postponement and Saudi Hajj cancellation.

GCC: The Gulf is not a safe haven unless (at least) oil prices recover
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
1 April 2020
Published byTellimer Research

The candidacy of the GCC (Gulf Cooperation Council) as a potential safe haven in the current global crisis, which hurts all emerging markets, is looking ever weaker, evidenced by the valuation de-rating of equity markets relative to developed markets and the onset of negative data points. 

This is consistent with our previously published views on equities in both the GCC and the lack of an island of isolation and immunity anywhere in the emerging markets (including China).

The MSCI GCC equity index is valued on forward price/book and price/earnings of 1.2x and 11.2x, respectively. These equate to 37% and 27% discounts, respectively, to developed markets. The PB discount versus DM is back to the widest seen since the global financial crisis. 

This discount is unlikely to narrow, and the GCC's candidacy as a safe haven is unlikely to improve, until there is, at least, an end to the oil war between Saudi and Russia.

The bad news is rolling in

Examples of the inevitable financial impact of Covid-19 related social distancing policies and the oil price war are coming though and reaffirm our view that in the smaller emerging markets there are no isolated islands of immunity from the global crisis. For example,

  • The oil price has fallen over 60% year to date;
  • Sovereign credit ratings: S&P has downgraded long-term ratings on Kuwait (to AA-, with a stable outlook, from AA) and Oman (to BB-, with a negative outlook, from BB) and Moody's has placed its ratings on both on review for downgrade.
  • Saudi: the Hajj pilgrimage is not certain to go ahead according to the minister responsible (there are c3m visitors for the major pilgrimage, Hajj, and c20m for the minor pilgrimage, Umrah, which is already restricted);
  • UAE: the Dubai government is granting an unspecified bailout to Emirates airline and admitted that Dubai Expo 2020 is likely to be delayed for a year.

Coronavirus war and the GCC

The GCC has some attributes which should enable it to counter Covid-19 perhaps as well as the best countries globally:

  • Government security and surveillance apparatus;
  • Young population demographic;
  • Low urban population density;
  • Low reliance on informal labour to enforce; and
  • Relatively developed healthcare infrastructure. 

However, there are key obstacles which impede the region's response:

  • Reliance on resident expatriate labour (and their families) in all sectors; 
  • Use of air-conditioning, shared apartments, office and retail mall real estate;
  • Densely populated blue-collar labour accommodation;
  • International visitors in the tourism, transport, finance and entertainment sectors (all key parts of the non-hydrocarbon economy); and 
  • Spillover from neighbouring Iran, which has not coped with Covid-19 (as well as not understanding or, perhaps not admitting, to the extent of its infections until relatively late).