Better year ahead for GCC corporates

Corporate earnings in the UAE are poised to swing back to growth at 24 per cent in 2011 after declining by an estimated six per cent in 2010, according to the Kuwait Financial Centre.

“The resurgence in the corporate sector after two years of dismal performance will be driven by the banking sector as we believe the worst is over for most banks with high levels of provisioning,” said M. R. Raghu, senior vice-president of research at the centre.

In the GCC overall corporate earnings are expected to grow another 22 per cent in 2011 following an estimated 22 per cent growth in 2010, mainly due to more stable growth in Kuwait and Saudi Arabia and a return to positive growth in Oman and the UAE, he added.

However, he cautioned that one could not expect to see the kind of stellar performances witnessed in the heyday of 2007. “There is definitely no going back to those days of 45 per cent growth,” said Raghu, who authored a report entitled What to Expect in 2011.

“After severely underperforming emerging market peers in 2009, GCC markets performed more on par with the same in 2010. Companies are still busy repairing their balance sheets and image, while governments are busy spending with nothing specific to write home about regarding regulatory reforms,” the report continued.

While oil prices did not “spring any negative surprise in 2010”, they did not do enough to propel the GCC market. “In the wake of mounting pressures in the form of weak earnings, ultra-weak liquidity and ever-present volatility, a stable oil price alone is not sufficient to lift the markets to heights that investors were used to in the past.

“One possible reason for the ultra-poor liquidity is that retail investors (constituting the backbone) are still busy putting their house in order while sources of traditional funding for stock markets has come to a complete halt. Earnings destruction in certain cyclical sectors like the investment sector has been too severe to stage a meaningful comeback.”

Predicting an upbeat outlook for the region, the report added, “Given firmer oil prices and a better global economic environment, the GCC is set to show stronger growth going forward despite slower private investment and credit growth continuing to be a drag on economic growth.

“Private demand is expected to remain weak in the intermediate term until investor confidence returns more fully and bank balance sheets return to a healthier state.”

Overall, the report remained optimistic about 2011 with “positive outlooks for Kuwait, the UAE, Qatar and Oman while remaining neutral for others”.