Weekly Equity Comment - 18 Auguest 2016

Oil price gyrations overshadow regional markets

Global equity markets continue to strengthen and a number of indices in the US are touching record highs. The market rally has been supported by better than expected corporate earnings and increased liquidity on the back of the quantitative easing that is being pursued by European, Japanese and British central banks. US rate hikes also appear to be on hold until after the US Presidential election.

Despite recent buoyancy in the equity markets, global growth appears to be faltering and the IMF have repeatedly lowered global growth expectations. Second quarter GDP growth remained lackluster in both the US and Japan. US economic data remains mixed, improvements in the labour market continue but last week saw disappointing numbers for retail sales, PPI and consumer confidence which were all below market expectations. In our opinion equity valuations are becoming stretched given overall global growth prospects, however, the prolonged low interest rate environment in the US continues to support the current risk on environment. Emerging Markets have reignited investor interest benefitting from low interest rates, excess liquidity in the system, a softer dollar and better than expected growth in the EM space.

Regional Markets:

In regional markets oil price has dominated sentiment. Oil prices recovered sharply over the weekend after the Saudi Arabia Energy Minister confirmed that Saudi will work with other oil producers to stabilise oil prices, possibly through a freeze in production levels. OPEC is scheduled to meet next month and in this context market expectations are building for a supply side agreement to be reached. As per EIA data US oil production declined by 15k barrels per day in the first week of August whilst US oil inventories increased by 4 mn barrels over the past three weeks. EIA expects oil supply demand balance to tighten towards year end. Oil price (Brent) gained over 6% last week with oil prices now hovering around USD 47 per barrel, however Baker Hughes rig count increased for the seventh consecutive week with 15 rigs being added to take the current total to 396 as compared to May lows of 316.

In Saudi Arabia, the King has awarded one month’s extra salary to defense and interior ministry employees as well as the National Guard, recognising their efforts in Yemen. This could boost consumption and non-discretionary spend in Saudi which year to date has lacked growth momentum.

Saudi credit growth eased from 10% yoy in April to 8.9% yoy in June. However, government demand for credit has surged in 2016 growing by 18.5% yoy and 23% ytd to June. The loan to deposit ratio at the sector level has reached the regulatory limit of 90% and three month SIBOR rose to 2.24% as against 1.54% at the end of 2015. Over the weekend, the Saudi Arabian Monetary Authority reiterated its commitment to maintaining Saudi Riyal’s peg to the USD despite the decline in foreign reserves. Liquidity levels in Saudi remain quite tight however the government is looking at easing measures including international bond issuance. In the near term we are cautious on the Saudi market with selective overweight positions geared towards beneficiaries of government’s National Transformation Plan.

Egypt and the IMF have reached a Staff-Level agreement over a USD 12 bn loan over a three year time period. The program falls under the IMF’s Extended Fund Facility (EFF), which is slightly different from a traditional Stand-By Arrangement (SBA) and is designed to help countries pursue fundamental structural reform agendas. The agreement still requires approval by the IMF’s Executive Board but will open the possibility for a first tranche of financing to be dispersed in early Q4 2016. We believe this to be a positive development for Egypt as a shortage of foreign exchange has hampered growth prospectus and fueled inflation. Consumer price inflation in Egypt came in at 14.0% yoy in July unchanged from June. Food inflation remains a major headline factor with prices increasing at their fastest pace since mid 2011 at 18.4% yoy. Given the depreciation of EGP in the parallel market in recent months inflationary pressures are likely to remain strong through to the end of 2016. Recent moves to raise household energy prices and the potential introduction of a VAT should will also retain an upward pressure on inflation. Overall we are cautious on Egyptian as it is likely to take some time before Egyptian economy can leverage its full growth potential.

In the MENA markets second quarter earnings were ahead of lowered market expectations but the overall environment remains challenging. Among regional markets Dubai stands out, the index has now risen 13.2% YTD with the real estate sector leading the charge. Dubai remains a beneficiary of a diversified economic base and also from foreign fund flow into emerging markets. We have been positive on the UAE market for quite some time and continue to hold an overweight position. Qatar has benefitted from fund flow due to its inclusion in the FTSE EM Index, after the recent strong performance valuations appear rich.

Saleem Khokhar, Head of Fund Management

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