Global equity market outlook remains positive
Global markets have corrected but to a limited degree, the overall pro-growth environment remains positive for equities with the caveat that the Trump policy announcements do not disappoint. For global markets we remain positive on US and India and with selective positions in Europe and Hong Kong but would tread carefully given the potential for an increase in volatility. UAE & GCC markets followed the lead of global markets with a correction followed by consolidation and the early stages of recovery. Further details can be found below.
Equity markets are going through a bit of soft patch after having a good start for 2017. Profit taking, lower US GDP growth numbers and a travel ban imposed by the US on seven countries is driving a market correction. Fundamentally, in US, so far 228 companies from S&P 500 index have reported their fourth quarter numbers which show a positive earnings surprise of 0.66% with financials and technology taking the lead.
US GDP growth in fourth quarter of 2016 stood at 1.9% as against market expectation of 2.2% and prior quarter GDP growth rate of 3.5%. The lower rate of growth was caused by decline in net exports by 1.7% as the trade deficit widened, partly due to a stronger US dollar. However, consumer spending - the largest component of the economy grew by 2.5%, in line with expectation, on the positive side GDP growth benefitted from growth in business investment which rose by 3.1%. Despite positive sentiment on Trump’s expansionary fiscal policies, the median growth forecast for US GDP remains at 2.3% for 2017 and 2018, which is still below its long term growth rate of around 3%.
Oil price is down 3% year-to-date with Brent trading close to USD 56 per barrel. In January, the US rig count recorded an increase of 41 rigs to 566, US rig count has been on steady upward trend since the oil price began to rebound from its low a year ago. US oil inventory remains stable moving up slightly to 494 mn barrels from 480 mn barrels. Implementation of OPEC productions cuts remains key and recent positive announcements by a number of GCC countries on output cuts has created confidence in OPEC’s agreement and resolve. The oil market is ignoring any potential increase in US oil production due to relaxation of regulation on environment and incentives which the Trump administration can provide to boost oil production. According to Goldman Sachs, US could potentially add 1.0 -1.5 mn barrels of new supply by next year on favorable Trump policies.
For regional markets, earnings season remains in full swing with 89 out of 189 companies reporting their numbers, overall earnings show a negative surprise of 2.9%. Negative surprise came from the consumer sector whereas positive surprise came from the healthcare sector. We remain positive on healthcare sector as we expect the sector to benefit from ongoing reforms in Saudi. In UAE, Dubai Islamic Bank reported slightly better than expected numbers, with positive surprise coming from decline in provisioning, however the bank gave guidance of 10%-15% credit growth in 2017, which is much higher than sector expectations of single digit growth.
S&P downgraded the Emirate of Sharjah by two notches to BBB+ with stable outlook, citing an increased debt burden. According to S&P, Sharjah’s debt burden has increased significantly since 2014 due to persistent fiscal deficits and increased capital spending.
Fund & Portfolio Positioning
Most Saudi companies have announced earnings and the broader index which has been a laggard year to date compared to UAE, Qatar and Kuwait seems to be recovering. Post the earnings season other than the MSCI EM event we don’t see any major catalyst for Saudi, thus we are comfortable with our underweight call. Our current position reflects selectivity ranging from banks that are geared to benefit from NIM expansion (lower costs of funds & FED rate hike), selective petrochemical names benefiting from wider margin and NTP plays.
As we approach the dividend season our positions are skewed towards UAE and Qatar as most companies in these geographies pay annual dividends. We have an overweight call on Qatar as we approach the dividend season moreover we also expect FTSE EM inclusion of Qatar to result in inflows of c.USD 500 million in March this year which should be supportive for the market. In UAE we await corporate results; the recent rally has been dominated by mid-small cap names. Kuwait continues to rally on expectation that country weight will increase in the MSCI Frontier Index if Pakistan is upgraded to EM status. Some of the leading names like NBK have announced numbers relatively better than the market expectation; we prefer to have neutral call for the Kuwaiti market at this point in time.
The overall cash holding in the funds and the portfolios has come down since the start of the year. We also keep an eye on the global volatility and any spike may force us to alter our positioning if required. The performance of MDL, Shariah MDL and IMGF are in line with respective benchmark performance. Our MIGF fund is scheduled to pay out a semi-annual dividend this month targeting annual payout in excess of 5% . UTF still continues to be in top quartile in the GCC space, while the performance of UAE mandates remains in line with the index.
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