International Monetary Fund upbeat on GCC

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International Monetary Fund upbeat on GCC

Markets expected to remain positive on one-year time frame

By Arjuna Mahendran (CIO WEEKLY REVIEW)

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Published: Sun 19 Oct 2014, 12:12 PM

Last updated: Fri 3 Apr 2015, 7:09 PM

The GCC markets will see the bulk of their quarterly earnings announcements next week and this should dictate their medium-term outlook. — KT file photo

The GCC markets will see the bulk of their quarterly earnings announcements next week and this should dictate their medium-term outlook. — KT file photo

Global equity indices were on average down three to five per cent last week and volatility is expected to persist. We refer to our September column, where we had looked to the possibility of an equity market fall not exceeding 10 to 15 per cent in developed countries, with local equity benchmarks following suit. Conservative investors can book profits on their gains and re-enter before year-end, once volatility has subsided; while more aggressive investors are advised to stay invested and ride out the downturn, as the view on markets remains positive on a one year time frame.

Dubai and Abu Dhabi equities closed marginally down affected by the global risk-off sentiment. While the International Monetary Fund (IMF) in its latest World Economic Outlook revised down global growth projections, it revised regional growth higher for the UAE, Qatar and Saudi Arabia (but not for Kuwait, where the forecast is lower). According to the new forecasts for 2014 and 2015 respectively, the UAE is to grow at 4.8 per cent and 4.5 per cent, Saudi Arabia at 4.6 per cent and 4.5 per cent and Qatar at 6.5 per cent and 7.7 per cent.

Of special significance is the large contribution coming from non-oil GDP, expected to rise by six per cent, as compared to oil GDP rising only by 0.5 per cent. However the steep fall in oil prices year-to-date will present a challenge to the IMF outlook, if it persists into 2015.

The GCC markets will see the bulk of their quarterly earnings announcements next week and this should dictate their medium-term outlook. Expectations are for mid-teen growth and any disappointment could lead to a further sell-off exacerbated by the regional tensions now spreading to the Turkish border. The growing number of Initial Public Offerings will also constrain liquidity in secondary markets.

Nevertheless we remain optimistic on GCC equities on a three to 12 months view. The value of GCC projects bounced by c. 31 per cent y/y in 2013 reaching $156.3 billion, from a four-year slump. The UAE leading economic indicators continue to signal robust expansion in the non-oil private sector.

In Qatar the focus of economic growth has shifted to the non-hydrocarbon sector and especially to the execution of the country’s ambitious public investment program, as articulated in Qatar’s National Vision 2030. With the culmination of a strategic phase of natural gas diversification, the authorities have embarked on a large public investment program to enhance economic diversification and prepare for the Fifa 2022 World Cup.

Saudi Arabia’s non-oil private sector expanded at a faster pace in September, while the leading indicator rose to its highest level since June 2011. Output grew at the fastest rate in three and a half years. Firms cited strong demand growth, particularly in the construction sector. The significant pick-up in activity over the last few months is also reflected in higher backlogs of work.

Concerns on global growth

Regional bond markets were a tad weaker across the board, with sharp movements in USD benchmarks. However sporadic buying amongst regional investors kept spreads steady; some of the popular names were the Sharjah Government sukuk, the Emaar Malls sukuk, the National Bank of Oman and the ENBD perpetual bonds. The only issuance was from the Republic of Kazakhstan, which sold a total of $2.5 billion. 10-year and 30-year sovereign bonds at 3.875 per cent and 4.875 per cent respectively.

The outlook for a weaker global backdrop fuelled demand for safe-haven assets. US Treasuries and UK Gilts strengthened by 14bps and US 10-year Treasuries closed the week at 2.28 per cent. As for ratings, Finland saw its AAA sovereign rating downgraded by Standard and Poor’s to AA+, while the Lebanese Republic was affirmed by S&P at B-, with stable outlook.

As the incumbent candidate in Brazilian elections appeared to be losing support, local bond markets reacted positively and the Brazilian CDS tightened. However investors’ attention was on Venezuelan debt and the ability of the country to meet its debt obligations. The Sovereign repaid $1.5 billion last week. Next in line is PDVSA (the Venezuelan state-controlled oil and natural gas company) where $3 billion matures on October 28. Venezuelan bonds have been very volatile and underperformed emerging market (EM) counterparts.

Volatility on equity markets continues, as The IMF downgraded the outlook for global growth. The world is forecast to expand 3.8 per cent in 2015, rather than the previous four per cent, due to a deteriorating macro picture for Brazil, Russia, the Eurozone and Japan.

Major German economic forecasters see basically zero growth in the last two quarters of this year and Angela Merkel, the Chancellor, came under fire for laying too much emphasis on austerity measures.

Overall we see the correction in global equity markets as being relatively shallow, since the level of corporate debt defaults remains low by historic levels, major central banks are still maintaining loose monetary policies and corporate cash hoards are plentiful among major global blue-chip companies.

The writer is the chief investment officer at Emirates NBD. Views expressed by him are his own and do not reflect the newspaper’s policy.

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