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Weekly Equity Comment - 06 September 2016

Saudi Arabia takes Center Stage as OPEC & Russia maneuver to reach an accord on capping oil production

Markets over the past few days have been positive with Saudi Arabia gaining traction, however, much is dependent on a potential OPEC and Russian agreement on oil production levels over the coming weeks.

With limited local news flow the regional equity environment was driven by a positive read across from OPEC and Russian chatter on a potential production freeze, probable direct investment flows post Saudi diplomatic meetings at G-20, lower than expected increase in US non-farm payrolls and continued investor flows into emerging markets. At the G20 summit the Chinese President urged G20 members to step up policy coordination in order to promote global growth and maintain financial stability and in a separate meeting with U.S. President he outlined that China's long term economic fundamentals remain sound and the Chinese government would adhere to policies that would maintain economic stability while still pursuing progress. China will firmly advance supply side structural reform, proceed with opening of the economy and further facilitate foreign investment access.

Oil markets are caught between weak fundamentals and the possibility of an OPEC output freeze; any constructive stance before the scheduled meeting in Algeria is challenging given that an accord may not be purely rested on economics. The latest statement by the Russian premier justifying an output freeze exemption for Iran could mean that Saudis’ stance on the issue could go beyond economic considerations. Iraq’s Prime Minister stated that his nation would support a production freeze in Algeria while Iran stated that it would attend the meeting although it has not yet deviated from its longstanding position that it would not sign on to a deal until it reached its pre-sanctions production levels. Given the uncertainty it is not surprising that the statements from various leaders at various junctures are causing large price swings. As far as fundamentals are concerned, during the week oil prices (Brent) declined by over 6% after EIA data highlighted that US oil inventories increased for second consecutive week. US oil inventories increased by 2.2 mn barrels to 525 mn barrels as compared to 519 mn barrels in mid July 2016. Baker Hughes report showed that U.S. oil rig count increased during the week to a total of 407 as compared to May lows of 316. On the positive side US oil production decreased by over 100K barrels per day over the last two weeks.

Regional Markets
Fitch ratings affirmed Saudi Arabia's ratings at 'AA-' with negative outlook and cited that the government's balance sheet, which has weakened due to lower oil prices, remains an important support for the ratings. Fitch expects Saudi’s balance sheet to weaken further due to high fiscal deficit; while shrinking from the peak of 13.8% of GDP in 2015 the deficit is forecast to remain high in 2016 at 11.2% and 6.8% in 2017, before falling to 2.4% in 2018. The improvement in deficit will be on account of higher oil prices and government's National Transformation Program.

UAE’s Economy minister recently stated that a draft of the long-pending bankruptcy law would be presented to the cabinet soon and expects to finalize the law by end of 2016. Under existing legislation, unpaid debt or the issue of a bounced cheque can land businessmen in jail. This has proved problematic for smaller companies in particular as some executives of troubled firms have fled the country, leaving behind bad debts.

In Dubai, IMG World of Adventure successfully opened a theme park which spans over 1.5mn sqft and includes two international brands, Marvel and Cartoon Network and two proprietary brands, IMG Boulevard and Lost Valley - Dinosaur Adventure. The park is expected to host more than 4.5mn visitors in its first year of operation compared to 5.7mn targeted by Dubai Parks which is expected to open by the end of October 2016. Qatar’s government will levy a new airport tax on passengers from the beginning of this month as the country seeks new revenue streams amid falling oil prices. Every passenger leaving Qatar from Doha’s Hamad International Airport, including transit passengers, will be charged QAR35 (USD9.61) for using airport facilities, c1.33mn passengers traveled through Hamad International Airport in June 2016.

Egypt’s parliament approved the long-delayed value added tax (VAT) at a rate of 13%, however, the rate will rise to 14% next year. The new tax is scheduled to be implemented during the month of September. The Minister of Finance said in July that the VAT may lead to price inflation ranging between 0.5% for low-income Egyptians and up to 2.3% for the upper class. Implementation of the VAT is expected to lower Egypt's budget deficit by 1% according to the deputy finance minister for tax policies. He added Egypt’s government is targeting EGP32 bn per year from the implementation of VAT. The 56 items to be exempted include basic foodstuffs, financial services, ADSL Internet (for the first year), education including international schools, real estate (buying, selling & leasing).

With regards to our funds and portfolios we remain positive on the UAE market and continue to hold an overweight positions. Following the recent run-up in Qatar we have reduced our exposure to Qatar and have increased our Saudi exposure given the positive stance on output freeze and attractive valuations. During the week we expect markets to trade on low volumes ahead of the upcoming Eid vacation.

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