Weekly Equity Comment - 19 July 2016

Over the weekend, Turkey witnessed a failed military coup; its fifth since 1960. Beyond the economic impact, the event also has geo-political ramifications as the Turkish government looks to ‘reform and clean’ the army which is also involved in operations against the Islamic state in Syria and Iraq. Immediate concern for the GCC region would have been through oil shipments that transit through the Turkish straits, however an escalation appears to have been avoided for now. As far as company specific impact is concerned it would largely be through foreign exchange translation on account of a weaker Turkish Lira which lost 5% after the coup. GCC companies have varying levels of exposure to Turkey and include Qatari banks, Saudi’s National Commercial Bank, Saudi Telecom, Emaar Properties, Agthia, DP World and Kuwait Finance House to name a few. As the week starts, the broader GCC markets have proved resilient and even the Turkish Lira has recovered some lost ground.  

Regional Markets
Saudi market has been range bound and investor flow data seems to shed some light on the investor behavior. An analysis of investor flow into the Saudi market reveals that Saudi Institutions were net buyers countering the continued negative fund flow from retail investors. Foreign participation is selective and indeed small in the Saudi context but has been positive in six out of the last eight weeks. Saudi is liberalizing QFI rules, to be effective from August 2016, which together with changes in the settlement cycle can create an enabling environment for foreign institutional money.

It is results season and so far in the region numbers have not disappointed in a major way, that said stock prices have not reacted to either positive or negative surprise indicating limited tactical positioning. Jarir Marketing reported a weak set of results, higher cost growth versus a flattish topline indicated aggressive discounting, the numbers are in line with our expectations of weak consumer spending in Saudi Arabia due to reduction in energy subsidies and low consumer confidence. Almarai, the largest consumer staples company in the region on the other hand reported a decent and inline set of numbers for H1-16. Saudi Bin Laden group has repaid the SAR 1bn bond that matured last month, a sign of easing and accommodation, earlier the company had raised SAR 2.5bn loan from local banks to cover employee costs in the month of May.

In banking sector, a number of banks reported their second quarter numbers and results were broadly in-line with expectation and thus concerns over steep rise in provisioning in slower growth environment from some market participants seems to be allayed. Qatar National Bank reported 16% YoY growth in net income, however if we exclude consolidation of Turkey’s Finansbank the net profit decreased by 3% YoY. In UAE, Emirates NBD reported 16% YoY growth in net income, primarily driven by decline in provisioning by 30% YoY, however pre-impairment operating profit decreased by 1% YoY. Abu Dhabi Islamic Bank reported 1% YoY growth in net profit and however loans growth picked up slightly by 2% QoQ and 7% YoY. In Kuwait, National Bank of Kuwait reported 7% YoY growth in net profit, the numbers were below market expectation but provisioning still remains high primarily driven by general provisioning. In Saudi, Samba reported 1.4% YoY decline in net profit whereas Riyad Bank’s profit increased by 1.6% YoY. National Commercial Bank’s net profit increased by 3.2% YoY however it was 3% below market expectation.

Our Mena funds and portfolios remain overweight UAE and Saudi with a bias towards defensive sectors. We anticipate good Q2 earnings from large cap names in the UAE Real Estate sector but are cautious on the banking sector in general. With regard to peer group ranking NBAD Mena funds continue to rank top quartile year to date with our IMGF fund holding the top spot having risen by 9.4% on a year to date basis.

Frontier Markets
The search for yield and lower for longer view on Fed rate has created a positive back drop for EM bond and equities reflected in continued inflows. Sri Lanka capitalized on this buoyancy as it tapped international debt markets, against a bond issue size of $1.5bn investor demand was in the range of $6-$7bn. Nigeria witnessed more attacks on its oil infrastructure which has already brought down production from a peak of 2.2mn BPD to 1.5-1.6mn BPD, any resolution could take the production closer to 1.9mn BPD. In addition, Canadian production has recovered after the wildfires in May that disturbed almost 1mn BPD of crude production. The crude markets are trading in tight range of $46-$48 levels; while technically the crude is well poised near term narrative in the oil story has centered around increasing rig count in US, widening contango, USD trajectory and normalization of supply in Q3 versus Q2. Our frontier market fund has recovered some ground after having been impacted by the Nigerian currency devaluation and now stands at an absolute return of +2.6% on a year to date basis.

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