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A volatile week

Weekly Equity Comment – 13 June 2017

It has been a turbulent week in Mena markets and in global markets the technology sector has begun to come under some pressure. We are monitoring both regional and global events and whilst we have reduced our exposure to Qatar significantly we are awaiting further clarity on global technology.

Over the last weekend US tech stocks, that have been market favorites, shed some gains with the Nasdaq being down by 3% in the last two trading sessions. Last week was also marked by election results in the UK, status quo from the ECB meeting and ex-FBI director’s testimony in the US. The equity markets have not reacted to these events, however GBP depreciated by 1.6%. The downtrend in oil price accelerated on the back of rising inventory levels and higher rig counts in US. In India, the central bank has kept key interest rates unchanged and maintained its neutral stance on monetary policy even as inflation has moderated. Inflation is trending lower but is partly a function of higher supply of food products, base effects and lingering impact of demonetisation.

Regional Markets
Qatar become the center of focus for regional markets last week after a dramatic escalation of diplomatic tensions with other GCC members. The source of Qatar versus UAE/Saudi conflict is largely to do with the former’s softer stance towards Muslim Brotherhood and Iran. We have been here before, the last time being 2014 when a similar spat resulted in respective ambassadors being recalled. The matter was resolved with a Riyadh Declaration which required a pledge that Qatar stop interfering in the domestic affairs of GCC countries. The difference this time around is that there has been a land and sea blockade with citizens of respective countries being asked to leave within 14 days. A resolution that took eight months in 2014 could take longer this time around, as UAE and Saudi Arabia could look at a stringent compliance framework this time around.

After an initial negative reaction from the Qatari stock market subsequent trading has been calmer. We anticipate some rotation into UAE and Saudi equities from Qatar equities. Most non-Qatari based companies have sub 10% revenue exposure to Qatar and thus earnings impact is expected to be contained. The risk of a prolonged stand-off remains, there has been no retaliation from Qatar to date which has sought to highlight potential resilience citing a strong balance sheet and its ability to defend the currency peg.

The much awaited event in Saudi Arabia, the announcement of MSCI EM watch list is expected on June 20 and though the actual inclusion would still couple of years way we expect some positive sentiment in the market. We continue to be selective with a high degree of focus on fundamentals as growth is expected to be scarce in an environment of low oil prices and fiscal retrenchment. Saudi has started imposing a “sin tax” on tobacco and energy drinks starting June 11 and expects to collect SAR 8-10bn on account of it. The regulations for VAT are expected by Q3-17 for planned implantation from Jan 1, 2018. The country saw progress on its privatization plans whereby a 20 year contract was awarded to Changi Airports for King Abdulaziz airport in Jeddah, in addition 30-year BOT contracts were also awarded for four airports in Taif, Qassim, Yanbu and Hail.

In UAE, Emaar Properties announced plans to list 30% of its UAE development business by Q4-17 and pay the proceeds as dividend to shareholders. Real estate sales in UAE have been robust and the event should unlock intrinsic value for Emaar.

Positioning
Turning to our funds and portfolios we have cut our equity exposure to Qatar and will watch the story as it evolves. The impact of current Qatari rhetoric is likely to be felt over the coming weeks and is likely to be amplified due to the Ramadan effect on liquidity. Our funds have moved to zero exposure to Qatar equities and our portfolios in general run significant underweight positions against an index weight of approximately 10%. Were the political situation to show signs of stabilising investor focus would quickly turn to valuations which are compelling for GCC markets and especially so for UAE where our funds and portfolios run overweight positions. Strategy for equity funds and portfolios would be to selectively deploy cash in a phased manner to take advantage of current volatility and valuations.

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