JEDDAH: Alkhabeer Capital, the asset management and investment firm based in Jeddah, has recommended that investors should selectively invest in GCC markets, and focus on companies that are not overly reliant on hydrocarbons.

GCC equity markets witnessed a sell-off as crude oil prices continued to slip, and Alkhabeer foresees that the region’s markets will face continued pressure, the firm said in a report.
According to the report, Alkhabeer recommends that investors also focus on companies with good balance sheets that are able to maintain their dividend payouts over a prolonged period.
“Overall, there are reasons for positivity in 2016 in spite of several risks to the global economy, and therefore, pockets of opportunity for diligent investors. As we see a deliberate and continued improvement in macro conditions and private sector confidence, we maintain a cautiously optimistic outlook for the future,” the report concluded.
Alkhabeer Capital recently released the 2016 edition of its annual market insight report.
Analyzing the growth prospects of the region’s largest economy, Alkhabeer’s Global Outlook Report 2016 tracks market performance and economic developments over the past year, and highlights key indicators and trends for 2016.
“Overall, 2015 has been a year of high volatility and accelerating developments,” said Alkhabeer Capital Outlook Report.
“The past 12 months have presented Saudi Arabia with an opportunity to reinforce its economic fundamentals while spurring a move toward greater diversification. Looking at 2016, we see a number of challenges facing markets regionally and globally, which will require careful management and prudent preparation to weather potential headwinds.”
The report provides Alkhabeer’s insights as to the world’s key financial markets, including a number of asset classes spanning equities, fixed income, commodities and currencies. It also outlines themes that will dominate business during the year and reviews the expectations of the previous year’s report.
According to the Alkhabeer’s report, a persistent weakness in oil prices has taken a toll on GCC countries. The recent budget announcements for this year by Saudi Arabia and its fellow GCC member states signal that governments across the region are scaling back non-essential spending, but are continuing to invest significantly in infrastructure, education, and social programs.
Over the course of 2016, Alkhabeer expects GCC countries to implement a series of additional reforms to help boost government revenue. Saudi Arabia, for instance, recently announced that it would implement a value-based tax on undeveloped lands, in order to increase revenues and discourage landowners from holding vacant plots.
Real estate experts believe that this move would add up to $13 billion (SR50 billion) in government revenues.
Reports also suggest that GCC countries are moving closer to implementing a Value-Added Tax (VAT), or sales tax regime, in the region, which could help increase domestic revenue.
The report also outlines that while growth performance in non-oil sectors has been impacted to an extent, they have remained largely resilient.
Although non-oil sector Purchasing Managers’ Index (PMI) readings, which measure the economic health of the manufacturing sector, have trended lower in recent months in Saudi Arabia and the UAE, they still indicate further expansion as the two countries continue to benefit from previous and ongoing diversification initiatives.
The Global Outlook Report 2016 also examines the state of the global economy, including the US, Europe and emerging markets.
After months of speculation, the US Federal Reserve finally hiked its key interest rates as 2015 ended, diverging from the accommodative policies of the Eurozone and Japan.
The US dollar, which has surged over the past year amidst talk of higher interest rates, is expected to strengthen further in 2016 as the Fed continues to gradually increase borrowing costs.
“The US economy is expected to outperform its peers, but we remain concerned about the dollar’s elevated strength paired with weakness in overseas markets, which might drag down the US economy,” the report commented.
As expectations of higher Fed rates gained momentum, US Treasury yields surged at the beginning of last year, but tumbled as Chinese stock markets slumped and investors looked to US treasuries as a safe haven.
Currently, while the US economy seems to be on a steady recovery path, Alkhabeer remains cautious of the possible headwinds to the inflation outlook, as commodity markets continue to slump.
In the euro zone, indices remained buoyed by the European Central Bank’s ultra-loose monetary policy, despite domestic issues and headwinds from abroad. Profit margins among European companies, however, declined toward the end of 2015, despite a weaker Euro, making exports more attractive to foreign buyers.
“Going into 2016,” said the report, “The substantial fall in the Euro has helped the region’s export activity, but this may have a limited effect on European stocks as weakening overseas demand may result in lackluster corporate performance, a symptom of the fragile Eurozone recovery.”
The report said that growth in key GCC countries’ non-oil segment has been impacted but only partially by the slump in oil prices.
Although the non-oil sector’s Purchasing Manager’s Index (PMI) readings in Saudi Arabia and the UAE have trended lower in the past few months, they have continued to remain well in the expansive territory, as these countries reap benefits of diversification efforts made in the past.
Activity in Saudi Arabia’s economic cities along with crucial infrastructure projects in Qatar which are unlikely to get affected ahead of the 2022 FIFA World Cup and the 2020 Dubai Expo, are expected to keep activity in the non-oil sector buoyant moving ahead.
Going forward, investors’ focus is likely to remain on the GCC region’s construction sector, especially amid worries that many projects could get scaled back or get rescheduled over an extended period of time due to fiscal repositioning.
Additionally, concerns are building up over prospects of VAT introduction in the GCC, as this tax could increase the cost of doing business and weigh on the non-oil segment’s performance in the region.