Weekly Equity Comment - 20 June 2016

Global Markets
The regional markets after muddling through OPEC and Fed meetings this month could be headed for a volatile week ahead of the Brexit vote scheduled for 23 June 2016. The FOMC last week left interest rates unchanged, as expected. The Fed ‘dots’ plot show a slower pace of monetary tightening with majority of FOMC members still seeing at least two rate hikes in 2016; importantly six officials versus one at the March meeting now see only one hike in 2016. The FOMC chair, Janet Yellen, highlighted that the recent economic data was mixed and it warranted a cautious stance, she also cited the UK referendum on EU membership as a factor in their decision to keep rates on hold. In Japan, the Yen rallied after Bank of Japan kept monetary policy unchanged, despite economic growth BoJ’s near-term inflation outlook has deteriorated increasing pressures for an additional stimulus. In India, increase in wholesale and retail inflation, driven by food prices and a sharp recovery in global commodity prices reduces rate cut expectations in the near term. Over the weekend, the RBI governor officially announced that he will not continue as the RBI governor after his 3-year term expires in September 2016, not a positive feed for the markets especially as lot of political chatter preceded the governor’s final decision to not continue for the second term.

Regional markets
Oil ended the week losing 2.7% after a five week positive run. As per Energy Information Administration report shale output is expected to decline by 118,000 barrels in July compared to June; data from Baker Hughes showed that the number of US rigs actively drilling for oil rose for the third consecutive week. Separate EIA data shows that US crude production has declined by 894,000 bbl from the June 2015 peak, inventories continue to trend lower.

The MSCI announced that China A-shares will not be included in the EM index while Pakistan will be included starting May 2017. For Saudi, MSCI stated that it welcomes the market accessibility enhancements announced by the Capital Market Authority and the Saudi Stock Exchange but fell short of putting it on a review list, thus an inclusion is not expected before 2019. Earlier the Saudi CMA had announced changes to the settlement cycle, elimination of prefunding requirements and the introduction of delivery versus payment as well as changes to the rules for Qualified Foreign Investors which are planned to be implemented by mid-2017. Once in effect, these enhancements will bring the Saudi equity market closer to emerging market accessibility standards leaving Saudi in the watch list until the next country review in June 2017. Oman after raising USD2.5bn from its first international bond sale in almost two decades is looking for alternative funding sources such as procuring a USD5bn to USD10bn loan from the international market to finance its budget deficit. The additional funding is to avoid draining liquidity from the local banking system and defend the peg. The governor of the Omani Central Bank said that falling state deposits amid the downturn in oil prices have led to a moderate liquidity squeeze in the banking sector and reiterated that Oman is committed to maintaining its peg to the dollar.

Qatar's economic growth is expected at 3.9% in 2016 and 3.8% in 2017, according to the Ministry of Development Planning and Statistics. Qatar's real GDP growth is forecasted to average at 3.6% over 2016-18, on the back of continued expansion in the non-hydrocarbon sector. Qatar's government expects to run a budget deficit for at least three years as low natural gas and oil prices weigh on its revenues. The ministry forecast a fiscal deficit of 7.8% of GDP in 2016, the first in 15 years and higher than 4.8% predicted for 2016 in the Ministry's last report published in December 2015. The deficit is expected at 7.9% of GDP in 2017 before declining to 4.2% in 2018. The ministry assumes the average crude oil price at USD48.91 per barrel in 2018, USD45.49 in 2017 and USD37.88 in 2016. In 2016 and 2017, Qatar's real GDP growth is also expected to be aided by the hydrocarbon sector; the Barzan gas field, after technical delays, is set to come on stream in H22016 and reach full capacity in 2017. In addition, the Ras Laffan II condensates refinery, is set to become operational in late 2017 and will add to hydrocarbon output in 2017 and 2018. Despite these developments the contribution of the hydrocarbon sector to real growth is expected to reduce.

Frontier Markets
Nigeria finally announced the liberalization of its FX regime; the final decision was better than expected as it effectively leaves the Naira value to be market determined versus our concerns of a devaluation accompanied by a collar or a staggered devaluation. The devaluation clears out the key hurdle for a Nigerian investment case, that said, the event needs to be followed up by subsequent growth driving measures. The event would be bottom-up negative but top down positive as it opens up prospects of a Eurobond issuance or IMF assistance to fund its fiscal deficit. The sabotage of oil infrastructure and its resolution is the key near term issue facing the Buhari administration.

Peer Group Ranking & Performance
Fund and composite portfolio performances remain strong in the Mena, GCC and Frontier Markets with a number of funds ranking top quartile versus peer group. However, our UAE focused funds and portfolios have underperformed year to date due to defensive positioning and a desire to limit exposure to Etisalat given that it forms over 20% of the S&P UAE Large/Mid Cap index.

Saleem Khokhar, Head of Fund Management

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