Weekly Equity Comment - 14 November 2016

2016 The Year of Surprises

The outcome of the US election was contradictory to what media polls were indicating; it was a clean sweep by Republican candidate Donald Trump. Interestingly, post election results the US equity market after an initial drop in the futures market of 5% reacted positively, contrary to market expectations. So far, 2016 has been full of surprises, be it Brexit, the US elections or market reaction after this latest event. Trump’s election manifesto has evolved around domestic trade protectionism and pro-growth policy driven by higher fiscal spending. We think, domestic trade protectionism polices might hinder exports from emerging markets and in turn the growth in emerging markets, this was partially evident from the sell-off seen in many emerging market currencies on Friday. On the other hand, pro-growth policies might lead to higher inflation; the sharp rise in US ten year treasury yield by nearly 35 basis points to 2.15% after election results seems to be reflecting potentially higher fiscal deficit and higher debt scenario.

We think it is premature to conclude on the impact of Trump's likely policies; while the President-Elect's economic plan appears good for US and not necessarily for rest of the world the possibility of these being diluted cannot be ruled out. We can already sense Trump’s change in stance on Obamacare where he is now ready to partially continue with Obamacare rather than completely scraping it. In addition, whether protectionism precedes fiscal stimulus or otherwise would dictate near term volatility in financial markets.

On the political front Trump has argued that he could cancel the nuclear deal with Iran; any changes to Iranian deal might have an impact on oil market through potentially lower supply from Iran, bringing US and Saudi closer but at the same time increasing geopolitical uncertainty in the region. We think for the MENA region, the impact of Trump’s polices would be primarily felt through oil prices. ‎Our stance on the OPEC deal is not conclusive, however we can speculate that Trump with his negative Iran stance and positive shale investment stance could just tilt the Saudi towards a no-deal. Nonetheless, OPEC members still have to navigate through oil production data sources, exempted countries, assuring compliance and actually deciding on the magnitude of output cut to start with if at all this is a change in OPEC policy.

In the region Saudi market continued to build on its gains, the market is now down 3.5% YTD having rallied 23% from its bottom in October 2016. The response to the Saudi bond issue and statements by the authorities that government will clear its payment backlog by the end of year has been quite strong; interestingly over the last month oil prices have declined by 14%. The Saudi interbank rate is expected to soften further once the government actually makes payments to the private sector. The buoyancy in the market could continue this week if the MSCI review scheduled for November 14 makes way for a fast track inclusion of Saudi into EM index. Even as we have selectively participated in the move our broader concerns around macro outlook and profitability remain.‎ In Egypt, the IMF followed through with its USD 2.75 bn loan post the currency free float. This number can increase to USD 12 bn based on progress of reforms and subsequent IMF reviews.

Saleem Khokhar, Executive Director - Head of Fund Management  

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