Weekly Equity Comment - 14 September 2016

Mixed outlook across the region

Global equity markets after a period of strength and low volatility over the summer months have started to show signs of weakness with investor focus moving to potential US monetary tightening. Equity markets had been supported by better than expected corporate earnings and stable liquidity conditions on account of accommodative policies pursued by global central banks. In our view equity valuations are becoming stretched in context of the global growth outlook.

Regional Markets
In regional markets the S&P Pan Arab Large Mid Cap Index was flat last month. Oil prices remain volatile reacting to concerns on inventory supply and an increasing US rig count, August oil as prices recovered to USD 50 per barrel 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. We have been here before and are already witnessing a retracement of oil prices to USD 47 in September but hope that the outcome of an informal meeting on the sidelines of the International Energy Forum in Algeria from 26-28 September 2016 does not disappoint.

In Saudi, liquidity in the banking system remains tight with the loans to deposit ratio of many banks close to the regulatory limit of 90%; three month inter-bank rate has risen to 2.3% as against 1.5% levels at the end of 2015. Even as the government continues to drawdown on foreign reserves to support the economy, non-oil imports and consumer spending trends continue to weaken. We see Saudi’s sovereign bond issuance planned for October as a beginning of series of issuances, GREs could follow. In the near term we expect the Saudi market to witness headwinds from poor economic data. Our overweight positions are geared to beneficiaries of the National Transformation Plan, a long term call.

The overriding catalyst in the Qatari market has been its scheduled inclusion in FTSE’s Secondary Emerging Market Index in the September 2016 review. The market had witnessed a strong run up toward the event but now appears rich in terms of valuation. There are 21 Qatari companies that are likely to be added to the Index, which would result in passive inflows of around USD 400mn.

Egypt is seeking a loan of US dollar 12bn from the IMF over a period of three years and also seeking to borrow USD 3bn from international market. We believe this to be a positive development for Egypt as a shortage of foreign exchange has hampered growth prospectus and fueled inflation. Recent moves to raise household energy prices and the potential introduction of a VAT would exert further upward pressure on inflation. The Egyptian currency may further devalue by 20% to 30% once it is allowed to float. With a number of macro uncertainties being prevalent we remain cautious on Egypt in the near term.

We remain positive on the UAE market given the Dubai’s relatively diversified economic base offers resilience as the bourse benefits from strong EM funds flow. In summary with limited domestic catalysts and acknowledged fundamental challenges, regional markets will be highly geared to global news flow and oil price movements for the remainder of 2016.


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