“The Gulf nations have utilised their vast oil wealth to undergo rapid modernisation in the space of a few decades”, says Mustafa Ahmed Salman, Chairman and CEO of Oman-based . “Endowed with abundant energy resources, these nations have transformed themselves and are now some of the richest nations in the world.” However, the oil price pressures of the present day threaten to inflict major pains on oil-dependent nations if they fail to recognise the changes at hand, and reduce their exposure to volatile price swings and precarious financial markets.
The shale oil revolution in the US, coupled with enhanced methods of recovery, has resulted in a worldwide supply glut that, without intervention, threatens to squeeze revenues in key oil markets
As the head of Oman-based United Securities, Salman is well positioned to pass comment on the region’s changing financial landscape and the fresh challenges posed by record low oil prices. Founded in 1994 with an ambition to become a one-stop shop for all the investment needs of large institutional and retail clients in Oman, the company’s client base has since grown to 23,000, made up largely of retail investors, high-net-worth individuals, and private, public and government companies. With a talented staff of 35 professionals, the firm has expanded its offerings to include brokerage, asset management, research and corporate finance services in the years since.
Survival of the fittest
An impressive track record counts for little in today’s low price environment, and the issues facing GCC-based firms like United Securities demand that they adapt quickly if they are to survive. “The dynamics of the oil markets have undergone a full 180 and we are now entering a new era where market-based pricing will prevail, and oil-producing nations may embark on policies aimed at defending market share”, says Salman.
Historically, global oil markets have rested with the OPEC nations, which have, since the 1970s, acted as the swing producers and chosen simply to turn off the taps in times of excess supply. However, the shale oil revolution in the US, coupled with enhanced methods of recovery, has resulted in a worldwide supply glut that, without intervention, threatens to squeeze revenues in key oil markets.
The GCC, for example, is seen by many as a one trick pony, with little more to offer aside from oil-related proceeds. The reality is not quite so straightforward, and the economic turmoil induced by previous oil shocks won’t be so easily inflicted this time around, according to Salman. In today’s climate, the GCC nations are protected against the low price environment, with the benefit of sizeable foreign exchange reserves and sovereign fund holdings, low debt to GDP ratios, solid macro economic data, favourable demographics, and big ticket spending programmes. “Worst case scenario, we expect spending plans that are in the pipeline or in the planning stage may be postponed. Yet, there are differences in how each regional economy has evolved over the years and how the current environment of low oil prices affects them individually.”
Saudi Arabia, Oman and Bahrain, for example, are all on course to post deficits of between five and 10 percent in the coming year, whereas Kuwait, UAE and Qatar are more flexible when it comes to balancing their budgets, with each of the three forecast to post fiscal surpluses. “Notably, GCC non-oil GDP growth is expected to continue at healthy rates outpacing the oil GDP growth rate. The current scenario, while resulting in short-term pains, will put pressure on governments to intensify diversification efforts in order decrease reliance on oil revenues in the long run”, says Salman. “Risks in the region include severe drops in crude prices below the $35 per barrel level, which could result in drastic measures; social unrest over flat incomes and possible cuts in social welfare benefits and spending; and geopolitical risks prevalent in the region.”
For financial services providers working in the worst affected GCC nations, they must adapt to the changing climate quickly or run the risk of falling by the wayside. “We have an impressive track-record of firsts that sets us apart from our peers in Oman”, says Salman. “We were the first to introduce internet trading and other technological innovations, like SMS confirmations, web based client accounts and so on. We also maintain liaisons with both global and regional investment houses to provide our clients with the best service possible.”
United Securities was also the first entity to introduce an online trading system in Oman, after launching its proprietary trading platform e-Tawawul in 2008. The platform grants clients easy access to the Muscat Stock Market (MSM) and allows them to view their portfolios, daily executed orders and up to date market news and statistics. “With its launch, e-Tadawul has increased our retail client base and its tailor made for clients who prefer non-discretionary accounts. The launch of this service also firmly placed our company in the spotlight for being a market leader in Oman at bringing forward innovative products and services”, says Salman.
Ready for anything
The firm is not without its weaknesses, however, and a low price environment means that companies like United Securities must shift their focus accordingly if they are to weather the storm. “As a financial services provider, we are not immune to the current market downturn. We have been proactive at rebalancing our managed funds and portfolios. We have altered our asset allocations to focus more on cash- and income-yielding securities to weather the turbulence in the markets right now. We are confident we will be nimble enough to shift strategies as and when the tide turns positive.”
Global financial markets are accustomed to overreacting in instances of sudden change, and the GCC is no exception to the rule. Both the Saudi Tadawul and Dubai Financial Market have retreated by 20 percent in the three-month lead-up to December, and regional indices in general have posted losses on a similar scale. “After the strong performance in 2013, positive sentiment regarding future prospects drove markets to new highs in the first three quarters of the year”, says Salman. “However, the pull back that followed crude price declines has eroded returns amid negative sentiments. Although this may sound ominous for Gulf nations, what we now have is clarity regarding the direction oil producers are embarking on.”
The outlook for the oil sector in the GCC nations looks bleak, with regional financial markets entering into a transitional phase where investors and stakeholders are in process of re-evaluating valuations with revised projections for all sectors, according to Salman. “We expect the GCC market to find its footing in Q1 2015 and sentiments to shift towards the positive side by the second half of 2015. By then, investors will have had time to take in the information and valuations will most likely be favourable or in line with revised estimates.
“In our opinion, current price levels offer attractive value propositions in certain sectors where oil prices don’t have a direct impact on operations. However, it’s important to note that further depression in oil prices can be a catalyst for continued underperformance of GCC markets. It’s difficult to estimate with certainty what the oil price floor is going to be and until we see a modicum of stability in crude markets, it will be difficult for regional equity markets to sustain any upward momentum. As mentioned earlier, this doesn’t truly reflect the economic fundamentals of the region and is mainly a function of sentiment driving down financial markets.”
Of the GCC nations, Oman is among the hardest hit by collapsing oil prices, although the impact has been muted, due in large part to the country’s focus on economic diversification. A budding hotel and tourism industry, alongside the Khazzan Natural Gas field – expected to come online by 2017 – and the development of a logistics infrastructure hub at Duqm should give Oman’s economy the boost it needs to offset falling crude prices. “The government has also eased regulations and, as a result, the country is more receptive to foreign investment in local industries. Also, the capacity of banks to absorb any government debt, and the reserves held by the CBO should act as a solid buffer in light of any fiscal deficits”, says Salman.
Still, the challenges for firms like United Securities number in the many, and only by taking up an intelligent position in the market can they negotiate an always-challenging financial climate. “Our aim is to provide a platform where every need of each one of our clients can be taken care of. All of our services work in unison to collectively enhance our total package of solutions, and as one of the earliest companies in the investment space in Oman, we have entrenched our brand name in the regional markets and earned the goodwill of our clients through sustained excellence. With robust market share in our industry, we are known both locally and regionally as one of top financial service providers in Oman.”
The focus for United Securities going forwards is on launching a new balanced strategy fund that provides investors with long-term capital appreciation and a steady source of income. “We have a two-way approach to enhance our services offered”, says Salman. “We are working towards attracting more international investors to the regional markets and increasing our visibility in the GCC region.
“Simultaneously, we are focusing on expanding international brokerage for local clients who wish to invest in international markets. We think there is significant untapped potential in the GCC region and with regional economies gradually opening up their industries, our position is that the next few quarters will be as good as any for investors with a long-term mandate.”