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Pausing for Breath

Weekly Equity Comment – 28 March 2017

We have taken a short term risk averse position in US markets of late due to concerns about the US government’s ability to execute stated pro-growth policies. Our fundamentally positive stance on US equities, however, remains intact with US equity markets expected to gain further ground. We remain positively positioned in India, Asia and to some extent Europe. MENA markets have lagged global and emerging markets but remain attractively valued with oil price close to the lower end of the recent trading range.  

Global Markets
Last week’s initial recovery in global equity markets fizzled out by Friday as the US government’s attempt to replace Obamacare with a new healthcare act suffered a setback due to lack of support. It is worth noting that equity markets have rallied close to 10% since Mr Trump was elected as the president of the US, expectation remains high that Mr. Trump will be able to deliver on his election promises. However, concerns are now being raised over his ability to deliver on key taxation and infrastructure policies.

Oil price was broadly flat last week with Brent managing to stay above USD 50 per barrel, however on a year-to-date basis oil price has corrected by nearly 10%. Even as US inventory continues to rise, the oil inventory levels in Europe and Asia continue to fall. Crude inventories in Japan are almost at a 10-year low. This week, OPEC is meeting in Kuwait to review adherence to the agreed oil production cuts, any positive statements about extension of cuts beyond June could be supportive for oil price.

Regional Markets
Last week, Kuwait was the best performing market in the MENA region with the price index up by 2.7% whereas Morocco was the worst performing market with the index declining by -3.6%. Kuwait market year to date has outperformed its regional peers, with the price index up by 22.6%. The outlook for the Kuwaiti market appears strong with pre-cautionary provisioning for banks expected to reduce and telecom companies expected to benefit from tariff increases. In addition, Kuwait’s index weight in MSCI Frontier market (FM) index is expected to increase as Pakistan moves out of the FM index on reclassification to an Emerging Market (EM).

Saudi Arabia moved closer to satisfying EM index inclusion requirements as it will move to T+2 settlement starting April 23, in addition the regulator also finalised regulations for short selling and rules for securities borrowing and lending.

Among large cap names, Savola was the best performing stock last week rising by 5.2%, there was no company specific news. Savola has been an underperforming stock for quite some time but the business model now appears to be stabilising. Masraf Al Rayan was the second best performing stock with stock up by 4.6%, positive momentum in the stock continues with the stock up by 16% YTD, though it is one of the most expensive stocks in MENA banking space trading at 2.6x book. DP World announced solid FY2016 results, revenue grew by 5% yoy and net profit jumped 30%. On a like-for-like basis, revenue came in flat while recurring earnings grew by 9% on higher EBITDA margin which expanded 4% to 52.6%. The company raised its dividend per share by 26% to USD 0.38/share broadly in line with profit growth. Management views 2017 to be another challenging year for global trade but expects throughput volume to grow ahead of the market.

Reuters reported that Emaar Malls Group has made a USD 800 mn offer to acquire 100% of Souq.com, a regional e-commerce platform with presence in the UAE, Egypt, Kuwait and Saudi Arabia. According to Arabian Business, Amazon agreed last week to acquire 100% of Souq.com for an undisclosed sum. Emaar Malls Group has not responded to the news and it is worth noting that Souq.com has an “exclusivity” clause as part of its negotiations with Amazon – meaning it would not be able to accept a counter offer while still in sale talks with Amazon.

Fund & Portfolio Positioning
The UAE remains our preferred market despite recent weakness. We believe that current valuations are extremely attractive and will override short term volatility. Within the UAE we are selectively positioned in the banking space with focus on attractive valuations, normalisation of provisions and improvement in net interest margins. After the recent correction, UAE real estate provides a good entry level. In Qatar we remain underweight with the FTSE EM related inflow now behind us, we expect the market to remain lacklustre.

In Kuwait we remain overweight as positive catalysts continue to support the market, preferred sectors being Banking and Telecoms. In Saudi Arabia we have moved to a neutral weight at the country level but are positioned in preferred sectors such as Healthcare and Real Estate which will be among the main beneficiaries of the National Transformation Plan. We remain underweight in the Saudi Banking sector, but are selectively positioned in a number of Saudi banks that standout on valuation metrics.

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