US election, Egypt devaluation and OPEC signal turbulence ahead
Global equity markets were in risk-off mode following the tightening of opinion polls in the US Presidential election and weakness in oil prices. Going forward, global markets are likely to be dictated by the outcome of the US elections. In our view, a Clinton win could see the focus shift back to economic data, on the other hand a Trump win could result in additional volatility before the expected rate hike in December. The probability of a rate hike in December now stands at c75% on the back of solid employment report and the better than expected GDP growth in the US.
Oil prices declined for a second week as EIA reports indicated an increase in inventory & US oil production along with Baker Hughes reporting an increase in the number of U.S. oil rigs. EIA reported an increase of 14.4 mn barrels in oil inventory as compared to an estimated increase of 1mn barrels. The report also highlighted that US oil production has increased for 5 consecutive weeks to 8.52 mn barrels. Oil prices were further pressured after media reports showed that Saudi threatened to raise their oil production if Iran did not agree to limit production. According to other media reports, OPEC members have not agreed on a single set of production figures from which to make an output cut and members including Iraq, Iran, Libya and Nigeria have asked for special treatment in curbing output. On the other hand, Russia is ready to cut once they see detailed figures agreed among OPEC members.
Despite weakness in oil prices Saudi was the clear outperformer last week, driven by positive sentiment post a successful bond issuance of USD 17.5bn, liquidity easing measures of the central bank and lower local debt issuance by the government. The Q3 results did not show any major negative surprise thus aiding sentiment.
SAMA recently announced that it is introducing a 90-day repo facility to help manage liquidity in the domestic market. Last month SAMA introduced 7 and 28-day repos. The central bank also said it would reduce its weekly debt issuance to SAR 3bn from SAR 9bn. The announcement gave further momentum to the Saudi banking sector and eased the gap between the 3 month SIBOR and LIBOR. The 3M SIBOR fell by 12.5bps to 2.25% since the announcement, however it still remains elevated compared to 1.54% at the end of 2015. Recent data from SAMA indicated that deposits have declined by 4% YoY and 1.4% YTD whereas credit growth continues at 7% YoY and 5% YTD in September. The decline in deposit has resulted in loan to deposit slightly exceeding the regulated limit of 90% for the 4th consecutive month.
In UAE the bank deposits increased for the first time in four months in September, rising 2.0% MoM and 5.0% YoY. Total bank loan growth remained strong at 1.1% MoM and 5.9% YoY in September. The loan-to-deposit ratio fell to 103.8% from 104.7% in August. The latest credit sentiment survey from the UAE central bank showed weaker demand for both business and personal credit in Q3 2016. Credit standards for businesses were also tightened last quarter, particularly towards SMEs, showing a higher degree of risk aversion on the part of banks in this sector of the market. In contrast, there was a modest easing in credit standards for personal loans in Q3 2016. Recent reports suggested that Dubai government mandated HSBC for arranging up to USD 3 bn in financing for further development of Al Maktoum airport; also in the news is Etihad Airways, which is preparing for a road show to raise funds via Sukuk during the month.
For Egypt, a highly awaited devaluation and increase in interest rates finally came through last week. The Central Bank of Egypt decided to float the currency to ease a dollar crunch and kick start the investment cycle in the economy. The EGP weakened by over 70% to EGP 15.3 versus the USD after the currency was floated. To counter inflationary pressures, the Central Bank increased interest rates by 300bps. IMF and World Bank both welcomed the move by Egypt and indicated that Egypt is close to securing a loan of USD12bn from IMF.
In our funds and portfolios we continue to favor UAE. In the UAE, Q3 results of all banks, indicated pressure on NIM’s and increase in provisioning. This week major real estate companies are expected to report in the UAE. After the recent rally in Saudi, we have started to reduce our overweight position. For Qatar we maintain our underweight considering lack of near term catalyst and rich valuations. In Egypt we continue to remain on the sidelines while keeping a close eye on the evolution of the new FX regime.
Saleem Khokhar, NBAD's Head of Fund Management
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