MIDEAST WEEKAHEAD-UAE, Saudi stocks may rally in new year

* 2012 was mixed, often disappointing for Gulf markets

* But many funds looking for strength in early 2013

* Real estate recovery may continue boosting Dubai

* Ultra-low bond yields should help equities

* Saudi petchem outlook murky, but banks may prosper

DUBAI, Dec 20 (Reuters) - Stock markets in the United Arab

Emirates and Saudi Arabia are likely to outperform other Gulf

Arab bourses early next year, buoyed by strong economic growth

and a recovery in Dubai's real estate market, fund managers and

analysts believe.

This year was a mixed and in many cases disappointing one

for Gulf equities, as the global financial crisis and

geopolitical tensions weighed on the region's markets despite

healthy growth in its underlying economies.

Dubai's benchmark index is up 17.6 percent so far

this year, exceeding a 14.8 percent gain for the Morgan Stanley

Emerging Market index. On the other hand, Abu Dhabi's

index has climbed just 8.8 percent and the Saudi

benchmark is up only 7.3 percent.

Kuwait, plagued by instability in domestic politics

that shows no clear sign of easing despite this month's

parliamentary elections, has edged up just 3.0 percent.

Qatar's index is down 4.2 percent, indicating

scepticism among investors about the benefits to listed firms of

the tiny country's massive infrastructure building plans.

So any hopes for big equities gains across the region next

year look over-optimistic. But a substantial amount of money is

waiting to enter the markets on dips, which should provide a

firm tone in the opening months of 2013, many analysts believe.

"UAE markets will retain a positive tone until the finish of

the year, given the overall expectation for equities in 2013,"

said Anastasios Dalgiannakis, institutional trading manager at

Mubasher. "On that basis, I would expect more positive

momentum."

REAL ESTATE

The gradual recovery of Dubai's real estate market from its

2008-2010 crash has been one of the Gulf's top financial trends

this year.

It has helped shares in leading Dubai property developer

Emaar Properties soar 44 percent this year, and with

that stock now close to this year's high, it appears possible

for the rally to continue.

Dubai is "emerging as the clear favourite among major real

estate investors across the MENA region. There are indications

that some of the lessons of the last real estate crisis have

been learned," consultants Jones Lang LaSalle said in a report

this week.

"The most important of these is the need to adopt a

long-term and coordinated approach, rather than developing too

much real estate too quickly. Providing this increase in

confidence does not result in negative over-exuberance, it is

likely that most sectors will continue to experience some growth

in prices and rentals in 2013."

Another factor sustaining the UAE is high expected dividend

payouts for some stocks. Air Arabia is among the

favourites, with a forecast dividend yield for 2012 of 7.5

percent, according to analysts; Abu Dhabi Commercial Bank

is expected to pay a 5.8 percent yield.

Companies usually announce their annual dividends during the

first-quarter earnings reporting season that starts in January.

"I'm very bullish on Q1 2013. Dubai and Abu Dhabi's markets

tend to rally in the first few weeks of the year, and liquidity

always increases as people position for dividends," said Shehzad

Janab, head of asset management at Dubai-based Daman.

"We're still relatively cheap and we have the dividend-led

uptick coming up."

Dubai's index is currently priced at about 9.5 times

expected 2012 earnings and 8.2 times 2013 earnings, according to

analyst forecasts.

"From an asset allocation perspective, I have a more

sanguine outlook on equities compared to bonds because the

relative attractiveness of bonds has declined with yields

shrinking in the recent rally," Janab added.

UAE markets however, continue to suffer from low levels of

trading activity. This week Al Habtoor Group, one of Dubai's

leading family-owned firms, shelved plans to raise as much as

$1.6 billion through an initial public offer of shares in Dubai

next year.

Analysts say stock market conditions have still not

recovered enough to be conducive to IPOs. Trading volume on

Dubai's bourse so far in 2012 is about 33 billion shares,

compared to 106 billion shares traded in all of 2009.

SAUDI

Saudi Arabia, the region's largest equity market, does not

lack trading volume; it has exchanged 76.7 billion shares so far

this year.

The market has rallied from an 11-month low hit in late

November, partly because of hopes for an increase in government

spending in the 2013 state budget, which is expected to be

released sometime in the next few weeks.

Prospects for the heavily weighted petrochemical sector,

which has been hit by weak global economic growth, are likely to

limit any further rally.

"We expect the total net income of the ten stocks under our

coverage to decline by 17.6 percent year-on-year...in 2012

mainly driven by the weakness in petrochemical demand and

selling prices," NCB Capital said in a research note on the

sector.

Also, there is speculation that the government could raise

the ultra-low domestic selling price for natural gas as soon as

next year, to cut waste. The rise would almost certainly be

modest, but it could hurt the bottom lines of petrochemical

firms which use the gas as a key raw material.

However, banks - the other major sector in Saudi Arabia -

are positioned for more gains on the back of solid economic

growth and a boom in infrastructure and housing construction,

many analysts believe.

"We are expecting 18 percent growth in earnings for banks"

this year, said Faisal Al-Othman, portfolio manager at

Riyadh-based Arab National Bank. "That puts the 2012 estimated

PE at a multiple of 9.2" - still not expensive.

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