Where to play this story.
We identify eight petrostate equity markets: Russia, Saudi Arabia, Norway, Kazakhstan, Qatar, Kuwait, UAE, and Nigeria. These markets have a capitalisation of nearly $2tn, and daily trading of over $6bn.
The attraction of investing in petrostates.
Most petrostates have an extremely resilient macroeconomic framework, sufficient to resist most external shocks. On average they deploy wealth funds with assets of 62% of GDP, enjoy a fiscal surplus of 5% of GDP and a current account surplus of 12% of GDP. We forecast 4% GDP growth this year and expect double-digit EPS growth for most petrostates in 2013.
The downside of petrostates.
Typically, they tend to authoritarianism, suffer from Dutch disease, and become ever more oil dependent; in many cases their elites indulge in rentier behaviour. If oil prices were to fall to low levels and stay there for an extended period, then GDP levels would fall significantly and many regimes would likely prove fragile.
Valuation levels.
The eight petrostates on which we focus trade at 7x 2013e consensus earnings and 1.0x book value, and split into three main valuation groups: Russia, Kazakhstan and Nigeria trade at 6x forward PE or less; Saudi Arabia and Kuwait have PE levels of over 10x; and Norway, UAE and Qatar enjoy PE levels in the 8-9x range, with average EPS growth of 14%.
Buy domestic growth.
Most oil money finds its way into the pockets of consumers, and this provides the best way for investors to get exposure to the story, in our view. We highlight Sberbank, Mostotrest and Globaltrans in Russia; Dar Al Arkan, Al Rahjhi Banking, Almarai and in Saudi Arabia; Emaar Properties, DP World and Aramex in the UAE; Zenith and GTB in Nigeria; and Halyk Bank in Kazakhstan.
Black gold.
Top picks that give growth exposure to the heart of petrostate wealth generation include Lundin Petroleum, Seadrill and Subsea 7 in Norway, EDC in Russia, and Zhaikmunai in Kazakhstan.
You too can be a rentier.
Top picks that benefit from their close relationships with the authorities include Uralkali and Novatek in Russia, Saudi Electric, Saudi Telecom and some Saudi petrochemical stocks, and Aldar and Sorouh in the UAE.
Implications for Russia.
Looked at as a petrostate there are some clear implications for Russia: autocracy is normal for petrostates; government spending is unlikely to be curtailed; difficult reforms are unlikely for so long as oil provides an alternative; diversification is unlikely to be significant; institutions are easily corrupted by the oil wealth and so on; but at the same time, the money is likely to keep coming in and the way to play this is through domestic growth companies and rentier stocks.
BNE
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