The outlook for GCC stock markets in the second half of 2012 remains bullish "due to comeback of market liquidity and robust government sector growth," Kuwait Financial Centre (Markaz) said recently in its semi-annual review titled "What to expect in 2012".

"For the rest of 2012, the report is still sticking with a Neutral view for most of the markets albeit with a Positive bias due to comeback of market liquidity and robust government sector growth," it said.

The report maintains a Positive outlook on Saudi Arabia for 2H12 due to increased economic activity, improving liquidity and earnings growth potential.

According to Central Department of Statistics and Information (CDSI), Saudi economy grew by 5.94 percent in 1Q12 on YoY basis. The Kingdom’s first quarter corporate profits rose 15 percent YoY to $ 6.7 billion. Value traded in Saudi came in at $ 332 billion for 1H12, a 114 percent YoY growth.

The authors of the report have upgraded the outlook on Kuwait from Neutral to Positive for the remainder of 2012 due to positive economic factors, increased earnings growth potential and a pick up in market liquidity. Kuwait earnings staged a comeback in the 1Q12 after three continuous quarters of de-growth. However, earnings dropped 25 percent over the year on account of a one-time gain of $ 959 million booked by Wataniya Telecom in 1Q11.

The authors have upgraded the outlook from Neutral to Positive for Abu Dhabi while maintaining a Neutral outlook on Dubai. Their Neutral stance on Dubai, despite its attractive valuations, is because of problems with GREs which could deteriorate if market environment for fund raising becomes difficult.

In June, MSCI announced that MSCI UAE and MSCI Qatar Indices will continue as Frontier markets until next annual review in June 2013. In 1Q12, UAE corporate profits increased 8 percent YoY and more than doubled over 4Q11 to $ 3.1 billion.

The report downgraded Qatar from Positive to Neutral for the rest of 2012 owing to its declined market liquidity and lower earnings growth potential. Qatar’s value traded in 1H12 was 9.7 billion which is a reduction of 25 percent YoY. Their earnings growth potential score for Qatar is neutral because of volatile commodity prices and expectations of reduced lending growth.

Although Oman is positive on economic factors and valuation it scores a negative on earnings growth potential and market liquidity resulting in an overall Neutral stance. 1H 2012 value traded was 1.3 billion, a decline of 17 percent on YoY basis. The authors expect robust government spending on infrastructure over the next few years.

The report gives a Neutral view on Bahrain. Bahrain is positive on valuation and market liquidity. Value Traded was 0.21 billion in 1H12 which is a growth of 56 percent on YoY basis. Bahrain scores a negative on earnings growth potential and geopolitical developments.

The report provides an outlook for 2012 by using the five forces framework which includes Economic Factors, Valuation Attraction, Earnings Growth Potential, Geopolitical Developments, and Market Liquidity.

Real GDP growth across the GCC reached 8 percent in 2011, as oil production increased. According to IMF estimates, growth in 2012 is expected to moderate to 5.3 percent level slowing down to 3.7 percent in 2013. Fiscal balances in the GCC are also expected to show a jump in 2012, compared to 2011. The real risk is the fall in global crude prices which might strain the balances.

Money supply, which witnessed a healthy growth in 2011, is expected to continue the same trend in 2012 as well. But GCC central bankers are cautious to grow money supply on concerns of stroking inflation thus making it difficult to maintain the currency peg.

At the beginning of the year, the authors were positive on all countries except Oman and Bahrain in terms of corporate earnings. Given the trend in first quarter and developments after that, the report is skeptical about those forecasts. Falling global commodity prices, modest growth in bank lending due to concerns on deleveraging and demand slow down and lack of positive developments in real estate are some of the reasons for their cautious stance.

After four years of continuous decline, liquidity levels in the market saw an increase in 2011. Value traded continued its uptrend in 2012 as well. 1H12 aggregate value traded came in at $ 371 billion, almost double the 1H11 number of $ 194 billion.

The first half of 2012 was mostly about the GCC markets reacting to events in the developed world. The regional markets clearly lacked major triggersk, except for the disappointment from MSCI, which came in June.

Concerns about Chinese hard landing also affected market sentiment due to its impact on commodity demand. Anemic growth in developed countries, combined with slowdown in emerging markets (especially China) pushed down Oil prices in the first half. Brent Crude lost 8.9 percent in the first half after a good 14.4 percent rally in the first quarter.

In their previous note in January, Markaz adopted a Neutral view of the markets due mainly to lackluster market activity which was overshadowing more positive indicators on the economy and earnings.

The report had adopted a Positive stance on Saudi Arabia and Qatar due to positive economic growth, earnings potential and market liquidity.

While Qatar was a surprise, the authors still maintain their Neutral view on Dubai. Attractive valuations and earnings growth from a lower base possibly helped Dubai post gains in 1H12. But authors of the report were still skeptical about its real estate recovery and issues surrounding its debt problems.