Last week’s speech by Janet Yellen at the Jackson Hole Economic Symposium and subsequent statements by other FED members had a hawkish undertone. The speech despite highlighting data dependency has re-kindled interest rate hike expectations that had reduced post-Brexit. In response to the FED’s hawkish tone the Governor of Bank of Japan stressed that he would not hesitate to boost monetary stimulus if needed while other central bankers stressed the need for fiscal support. Investors will closely watch upcoming economic data including the important non-farm payroll numbers, nonetheless market implied probabilities of a rate hike in September and December have increased dramatically. Emerging markets despite strong fund flow this year could see currency and market volatility were US rates to rise.
Oil prices (Brent) after the lows touched during early August have moved sharply toward USD 50/bbl after the Saudi Arabian Energy Minister indicated that Saudi will work with other oil producers to stabilise oil prices, possibly through a freeze in production levels. The political dynamics of oil producing countries are extremely complex and we would not be surprised if the outcome of the informal meeting on the sidelines of the International Energy Forum in Algeria from 26-28 September 2016 were to disappoint. From a fundamental perspective EIA data highlights that US oil production decreased by 49K barrels per day whilst US oil inventories increased by 2.5 mn barrels in the third week of August. Baker Hughes report showed that U.S. oil rig count remained flat during the week after eight weeks of consecutive increases to a total of 406 as compared to May lows of 316. Meanwhile, Canada saw an increase of 25 oil and gas rigs this week, with a total of 146 rigs now in operation.
Saudi Arabia's market regulator, the Capital Market Authority (CMA), has included qualified foreign investors among the types of institutions allowed to bid in the book-building process for the initial public offerings (IPOs). This change comes as part of the CMA’s new list of guidelines on book-building and the allocation process for IPOs on Tadawul, which will become effective from January 1, 2017. Earlier foreign investors were allowed to participate in an IPO on a case-by-case basis. We view this as a positive development for the Saudi market as such steps should support its probable inclusion in MSCI EM Index in 2018.
According to media reports, the Saudi Department of Zakat has instructed that private sector companies should gradually move to electronic billing systems from October 2016. The transition to e-billing is a decision that paves the way for imposing sales tax in the Kingdom, according to the secretary general of Saudi Organization for Certified Public Accountants. In addition to a GCC wide VAT from 2018, the Saudi Government is set to impose taxes on a range of commodities including a 50% tax on soda drinks, a 100% tax on energy drinks and a higher rate of tax on tobacco products. While negative for consumer spending such measures would provide some fiscal relief to the government. According to MEED the buyout of Saudi Oger could be closed in the next few weeks, the contractor is expected to be taken over by private investors close to the country's ruling family while a royal decree could be issued to give control of Saudi Oger to a state-owned investment firm before the upcoming Eid holidays. The company is facing working capital issues with $800 million in outstanding salary payments, the company also has USD 3.5bn debt at regional banks. A similar issue at Saudi Bin Laden had been resolved by the authorities. Both developments indicate a resolve to prevent corporate failures in the country allaying concerns that have surrounded banking sector asset quality.
BNC Network a company that tracks construction projects in the region released a report on Dubai’s construction market, as per the report there are more than 3,700 ongoing projects in Dubai with an estimated value of around USD 400 bn. The report estimates that total spending on infrastructure projects related to ‘Dubai Expo 2020’ might reach up to USD 18 bn. The report highlights that 21% of reported projects are currently on hold and that projects worth USD100 bn are in an advanced stage of construction. High value projects under construction include the Sobha Hartland Development (USD 2.1 bn), the Royal Atlantis Resort and Residences at Palm Jumeirah (USD 1.4 bn) and the Innovation Hub PT-163 at Dubai Internet City (USD1.2 bn). With GDP growth in UAE forecast to be below historical average in the near term these on-going projects lend support to economic growth in Dubai. According to Emaar’s H1 numbers the company was successful in selling close to AED 8.8 bn worth of properties during the first half of the year.
An indicative list published by FTSE Russell showed that a total of 21 Qatari stocks will be eligible to be added to FTSE’s Secondary Emerging Market Index in the September 2016 review. The list includes companies such as: Al Meera Consumer Goods Company, Barwa Real Estate, Ezdan Holding Group, Industries Qatar, Ooredoo, Vodafone Qatar, Commercial Bank of Qatar, Doha Bank, Masraf Al Rayan, Qatar International Islamic Bank, Qatar Islamic Bank, Qatar National Bank. Changes to the index will be effective as of 20th September 2016, FTSE Russell client products are scheduled to be released on 31 August. Index changes are expected to result in passive inflows of around USD 400mn.
With regards to our funds and portfolios we remain positive on the UAE market and continue to hold an overweight position. We have also increased our exposure to Qatar which is expected to benefit from passive flows due to inclusion in the FTSE EM Index. While a number of factors and catalysts supporting strength in the regional markets remain, investors are beginning to voice slight concern with regard to valuations. With regard to Saudi medium term concerns remain in the form of tight banking sector liquidity, unsustainable fiscal support through forex reserve depletion and further subsidy cuts that are scheduled to begin from 2017.
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