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Weekly Equity Comment - 26 October 2016

Saudi’s Bond Issuance Reassures Regional Investors

Global equity markets were relatively stable last week, there were no unpleasant surprises on the central bank policy front but company earnings were mixed. Economic data out of the US was generally in-line with investor expectation leading to the probability of a December rate hike of above 67%. The EUR declined last week following the ECB policy meeting despite ECB President Draghi indicating that an extension to the EU QE program had not been discussed, Draghi indicated that an abrupt halt to asset purchases is unlikely and the ECB left rates unchanged. With the current QE of EUR 80bn per month, continuing until March 2017, decision of an extension of the asset purchase program could be indicated in the December policy meeting. The coming week will be dominated by the first estimate of Q3 US GDP which is expected to show a growth of 2.5% up from 1.4% in Q2. Economic data apart, USD will also be tracking recent opinion polls which put Hillary Clinton in strong lead over Donald Trump, providing comfort in economic policy continuity.

Oil prices gained during the past week despite Baker Hughes reporting that the number of U.S. oil rigs in production rose by 11 to 443. Oil gained after EIA reported a decline in US oil inventory of 5.2mn barrels as compared to an expected increase of 2.7mn barrels and was further supported by reassuring comments from Russia. Kuwait's Finance Minister and acting oil minister Anas Al-Saleh expects crude oil prices to be between USD50 and USD60 a barrel over the next 15 months. Saleh also confirmed that serious efforts were being made to balance interests of both producers and consumers.

The long awaited KSA sovereign bond issue was completed last week with Saudi Arabia raising USD 17.5 bn from an oversubscribed order book of USD 67 bn. The issue was the largest bond issuance for the year ahead of Argentina that raised USD 16.5bn in April. New 10-year bonds were sold at a yield of 3.25%, 30 bps above Qatari comparable. According to investment bankers, the Saudi deal has attracted interest from a broad range of investors beyond the traditional buyers of dedicated emerging market debt with Asian central banks, European sovereign wealth funds and Middle Eastern banks all participating in the deal. The Saudi market rallied pursuant to the bond issue and comments from finance ministry officials that payments to contractors could gather pace were positively received. We are circumspect that the bond issuance can fully address liquidity issues in the banking sector but recognise that this is a very positive step to addressing a number of concerns.

With 3rd quarter earnings season in flow, 88 out of 154 companies in the S&P Pan Arab Large Mid Cap Index have reported. Overall earnings have largely been in line with estimates. However with slowdown in economic growth and implementation of various austerity measures some companies have witnessed a decline in revenue and growth in earnings . Sequentially telecom, bank and oil & gas sector were the major driver of negative growth. In the  utility sector Saudi Electricity stood out delivering stellar financial results as the company benefited from higher tariff charges and the summer season.

In our funds and portfolios we continue to favor UAE and select Saudi companies. In Saudi, within the banking sector we prefer banks with liquid balance sheets that are less likely to be impacted by asset quality deterioration. In UAE visibility of earnings in the real estate sector provides a high level of comfort but we remain underweight Qatar on a valuation call.

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