In a period of increasing interest rates and stable oil prices, the GCC economy has already started seeing signs of improving dynamics that are driving momentum in its markets.
As the geopolitical situation remains a concern, weighing on investors’ minds, these improving dynamics can help offset the impact of the challenging geopolitical backdrop, and drive investor sentiment as we enter 2019.
If we look at the banking sector for instance, higher interest rates, together with lower provisions in line with regulatory requirements, have created a favourable environment for banks to deliver a robust performance in 2018. This helped UAE banks to deliver positive growth during the year, and this was particularly valid for the Abu Dhabi stock market, which saw a 1.8 percent increase in year-on-year earnings in Q3.
In fact, Abu Dhabi banks saw a healthy growth in earnings in Q3 of 10.5 percent over the same period last year whereas Dubai banks enjoyed an 8.5 percent growth over the same period. As interest rates are expected to continue to increase through 2019, this positive momentum is here to stay.
As an emerging sector for the region, technology has been at the top of agendas
On the other hand, the outlook for the real estate sector is much more mixed. We are seeing a number of positive developments in the sector that should theoretically improve performance, such as decreasing property prices as well as attractive incentives offered by local developers to make real estate investment more affordable.
However, as supply continues to surpass demand and interest rates continue their upward trajectory, real estate recovery is not expected in the near term. Instead, we may witness a period of consolidation where prices stabilise for some time before they start increasing again.
Higher interest rates, resulting in higher mortgage rates, combined with relatively high mortgage origination fees charged by lending institutions are extra hurdles investors need to consider prior to making an investment.
A positive phenomenon is the healthy M&A activity in the MENA in general and the GCC in particular. M&A activities have totaled over $10bn this year, a 3 percent increase over last year. The GCC banking sector is already seeing an increasing level of consolidation that is creating synergies and healthier, leaner and more efficient banks in a highly competitive market.
This is particularly true in a region that has been historically over banked. Following the completion of National Bank of Abu Dhabi and First Gulf Bank’s merger this year, more consolidations are expected to take place, with early merger talks already announced (or rumoured) by Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank in the UAE, Bank of Sharjah and Invest Bank also in the UAE, Saudi British Bank and Alawwal Bank in Saudi Arabia and by Oman Arab Bank SAOC and Alizz Islamic Bank SAOG in Oman.
GCC governments are playing a growing role in stimulating economic growth
This healthy trend is not limited to the banking sector as we have also seen an increase in M&A activity in the sectors of healthcare, education and technology. This trend is expected to stay in 2019, and as these sectors continue to attract foreign direct investment (FDI) and remain a key area of focus for regional governments, further growth is expected in the coming year.
In fact, GCC governments are playing a growing role in stimulating economic growth and boosting investor confidence in regional markets. As an emerging sector for the region, technology has been at the top of governments’ agendas and a broad range of initiatives and incubators have been put in place to support its growth and help nurture and attract tech talent into the region. Though it is not overly visible just yet, investing in technology has picked up in the past 18 to 24 months and is expected to attract more interest and support in 2019 – and well beyond into the future.
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