(MENAFN- Khaleej Times)There are over 25 business sectors that have the potential for creating higher value to reap dividends from investments.
Dubai: The financial and industrial sectors in the GCC offer prospective investors the most potential for higher returns while oil and gas sector is in the lowest rung as a potential sector for investments an analysis note released on Sunday on the potential of the regional investment scenario said.
Entitled “Finding Value in the Gulf Cooperation Council Region” the analysis note prepared by India-based global alternative investment major Arthveda Capital said 85 companies in the GCC matched the value-investing criteria.Value-investing criteria assessment based on its analysis of the 312 companies in the S&P GCC Composite Index is done on the basis of financial risk business quality and cheap valuation.
According to Arthveda while the overall outlook for GCC investors remains bleak with the current inflation level lying between two and three per cent there are over 25 business sectors that have the potential for creating higher value to reap dividends from investments.
Projecting a GCC Smart Alpha index allocation the analysis note said that financial and industrial sectors led the potential for higher returns at 35 and 29 per cent respectively. Oil and gas surprisingly accounted for a mere one per cent within the value-investing analysis framework while consumer services were at nine per cent consumer goods at six per cent basic material at eight per cent telecommunications at seven per cent healthcare at three per cent and utilities at two per cent.
The note also said that “the GCC Smart Alpha index significantly outperforms the benchmark with an average annual return of almost 11 per cent which corresponds to a high excess return equal to nine per cent when compared to the S&P GCC Composite price index. The Smart Alpha index comfortably outshines the benchmark from a risk perspective as well with its annual standard deviation of 13 per cent being much lower than the benchmark’s standard deviation of 19.2 per cent.”
Applying the Smart Alpha Value Investing framework based on the Graham-Buffett way to the S&P GCC Composite Index the Arthveda Capital analysis note said that oil and gas sector was in the lowest rung as a potential sector for investments.
The Graham-Buffett way of value investing is based on the principles enunciated by Warren Buffett and his guru Benjamin Graham. Under the value investing framework investments are done in value stocks that are not necessarily defined as those available at low price-to-earnings or low price-to-book ratio but rather those available at a significant discount to their intrinsic value based on a discounted cash flow analysis.
The analysis said GCC investors can unlock value and reap dividends by taking a value-investing approach as the region offers a diversity of high-return opportunities across verticals in the non-oil sector.
Arthveda Capital said that given the scale and diversity of the region there would always be businesses that create superior value if an investor utilises the right tools.
The analysis note said that investors focused on the Middle East/GCC market had little to be cheerful about in the past six to eight months.
“The post-2009 recovery has been marred by a dramatic decline in oil prices — the steepest since 2008. The GCC equity market has also been sluggish yielding a mere 1.6 per cent CAGR in the last 10 years the note said adding that the overall outlook for a GCC investor also remained bleak as instruments such as fixed-income funds were not lucrative in the prevailing low-interest scenario.”
“In addition the offshore fixed-income options such as sovereign bonds can either hold their capital at low yields of less than two per cent or face risk of capital loss as US Fed rates increase” the note said while emphasising that the alternative to such a dull investment scenario is to focus on regional businesses that create value and not at the stock market.
Offering an analytic view to GCC investors on returns potential from a Smart Alpha Value-Investing framework the Arthveda Capital note said that contrary to the popular belief the GCC is a highly diversified market with robust non-oil sectors such as real estate insurance food production construction and others.
“The GCC region currently has a population of over 49 million growing at a significant four per cent annually along with a combined GDP of $1.6 trillion with growth rates ranging between four to eight per cent. Given the scale and diversity of the region there would always be businesses that create superior value” the note said.
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