Weekly Equity Comment – 17 July 2017
A strong performance from Mena equity markets over the past week with our Mena and UAE equity funds and portfolios registering between 2% and 4% return. Mena equity returns were supported by a stable global backdrop and higher oil prices, underlying fundamentals support a continuation of recent strength albeit at a slower pace.
Another positive week for global equity markets post Janet Yellen’s slightly dovish comments on inflation and interest rates, Yellen also played down market concern over the Fed’s balance sheet reduction plans. Recent data on US inflation and retail sales was below expectation and supports a gradual rate hike scenario. US inflation rate declined from 1.9% in May to 1.6% in June while retail sales declined by 0.2% MoM as against a 0.3% MoM decline in May. US earnings season started on a positive note with US financials reporting better than expected numbers, among the large cap names CitiBank earnings were 6% better than market expectation while J P Morgan numbers were 8% above market expectations. US and a number of global indices are now trading at all-time highs with valuations continuing to rise. In the currency market the Euro continued to strengthen against US Dollar with the trade weighted Euro index gaining by 0.4% last week. Oil prices moved up by 5% last week rebounding from earlier losses as inventories and rig count data appeared to soften against recent trends. US oil inventory was lower by 7.6 mn barrels but concerns around further production increases in the US remain.
Regional markets strengthened across the board last week with international and regional investors increasing exposure. Higher oil prices and the potential for positive upgrades to Saudi growth forecasts aided sentiment. The UAE market, which had been lackluster despite low valuations, regained momentum gaining 4% last week. In Saudi, two banks – Al Rajhi and Banque Saudi Fransi increased semi-annual dividend payouts, providing a new catalyst to the market. The move appears sensible as Saudi banks in general carry excess capital and anticipate mid-single digit loan growth in 2017. The Saudi banking sector and particularly the frontline banks have done quite well after the MSCI EM watch list inclusion announcement but we are of the opinion that valuations still remain attractive. Last week the Qatari market also moved higher after Qatar signed a memorandum of understanding with the US on combating terrorism financing but the lack of resolution of differences, as highlighted by the Riyadh accord, with a number of GCC countries remains a concern.
Earnings season for MENA markets started on a positive note with National Bank of Kuwait reporting 11% YoY growth in earnings. Jarir Marketing reported 17% growth in earnings, expectations around the consumer space in Saudi Arabia have turned positive after the recent reinstatement of allowances for civil service employees. In UAE, DAMAC continues to surprise the market, with the stock up by 27% in July and 75% year-to-date. Though the overall real estate market in UAE remains soft, Damac’s recent addition to MSCI EM index has boosted fund flow into the stock. In Abu Dhabi ADNOC may list its Service Station company at a valuation of circ. $10bn. In Oman, BankMuscat and Omantel earnings were below market expectations.
Saudi Arabia slashed export tariffs on cement by 50% and cancelled export tariffs for steel. After the initial positive reaction, cement company stock prices reverted due to lack of export opportunities and mounting clinker inventory. Zain Saudi is planning a sale and lease back of 7,500 towers to free up capital and prevent capex duplication in the sector. The spate of recent REIT launches in Saudi Arabia is expected to continue post announcements by Al Tayyer and Al Khaleej Training of plans to sell their assets into a REIT. Earlier Alandalus Property had entered into an MOU with NCB to sell its main mall to a REIT.
Fund & Portfolio Positioning
We maintain our positive outlook on the Saudi and UAE equity markets, investor focus has now moved to second quarter numbers and while we don’t expect any major earnings surprises we are mindful that petrochemical prices have been on a declining trend and this will likely be reflected in a number of earnings announcements in the sector. A couple of large cap Saudi banks with significant government ownership have surprised with higher dividend payouts, but it remains to be seen if a similar trend develops across the wider market.
We have exited our Qatari positions in all of our equity funds and in most of our equity portfolios, in terms of relative performance the recent move in the Qatari market, up by +6%, was countered by gains from our Saudi and UAE positions. We see little immediate incentive to add Qatari exposure to our funds and portfolios at this point in time and await further clarity on diplomatic efforts.
In summary we maintain our overweight position in UAE, Saudi Arabia and selective names in Kuwait while having an underweight call in Qatar, Oman and Egypt. Cash positions stand in the range of 1% to 5% and we will look to deploy as and when opportunities arise.
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