UAE: Oasis in the global storm

Expo 2020, the MSCI’s inclusion of the UAE and Qatari markets in the emerging market category, infrastructure spending across countries — the GCC Railway project to mention one — the revival of trade, tourism and real estate — as tensions in Egypt, Syria and Iran subside somewhat — are further fuelling momentum in the GCC macro trends.

Although we continue to like regional equities, we currently see more value in Saudi Arabia, Kuwait and Qatar, which are trading at an average discount of more than 20 per cent to the UAE market. This was led higher for the week by Dubai’s DFM, once again the best performing regional benchmark (up 4.3 per cent). boosted by construction and real estate stocks.

In the UAE the construction sector (up 10.4 per cent) was the best performing, led by Arabtec (up 13.6 per cent) and Drake & Skull (up 11 per cent). Arabtec announced it had signed an agreeement with Aabar Properties to build 37 residential and hotel towers in Abu Dhabi for Dh22.44 billion.

In the GCC, the petrochemicals sector (down 0.3 per cent) performed worst, led by Industries Qatar (down 3.8 per cent) and Sabic ( down three per cent), on concerns that the slowdown in China can impact demand and prices for petrochemicals products.

According to consensus estimates, the industrial sector in the GCC — 11.7 times PE, profit growth of 44 per cent in 2014 — has the largest upside (5.4 per cent growth), whereas the construction sector — 20.7 times PE, profit growth of 13.9 per cent in 2014 — has the biggest downside potential (14.5 per cent decline).

Emaar Properties was upgraded to investment grade status by S&P, triggering a 6.5 per cent rally in the stock for the week. Analysts upgraded equity target prices — as it has been the case for the last two months — to a consensus estimate of above Dh9.

In the fixed income space, a downgrade of Ooredooo (the former Qatar Telecom) by S&P from A to A- had no material impact, as the region still sees strong bond demand on lack of new issuance. We continue to prefer high-grade and investment grade credits within the GCC — the UAE, Saudi Arabia and Qatar — of five- to seven-year maturities.

Outside the region, markets continue to be volatile. Non-GCC emerging markets are still turbulent — Turkey’s outlook was downgraded to negative from stable by S&P and Moody’s downgraded Ukraine’s Sovereign to Caa2 (outlook negative). January US and UK macro data are pointing to a slowdown versus elevated fourth-quarter numbers, while some deflationary pressures are surfacing in Europe. For now we can blame this on adverse weather.

Uncertainty could be compounded by Federal Reserve Chairwoman Janet Yellen’s first testimony before Congress this week. Yellen famously defended the need to keep loose monetary policy in her confirmation hearings before the US Congress in November, and then went on to surprise markets in December when the Fed announced its intent to commence the tapering’of its quantitative easing programme.

Meanwhile, the US Congress has increased the borrowing limits for the US government, avoiding another re-run of a government shutdown when money runs out on February 28.

We still think that in relative terms, investing in developing-market risky assets — US and Japan — is a safer proposition than catching a falling knife in the emerging market space. The slowdown in developing markets appears to be temporary and it will be key on this front that US data — especially labour numbers — pick up after the late aberrations caused by the harsh weather in December.

With a rebound in the latest sessions, broader credit markets strengthened outperforming sovereign bonds. However, near term volatility still resides as investors and fund managers keep a close eye on global macro data. US 10-year strengthened to 2.68 per cent on Friday close after US payroll data.

New issuances have emerged once again; Slovenia, Slovakia, Bulgaria, and Pakistan are all looking to tap debt markets. In the region, Dubai Investment Park is road-showing for a debut sukuk sale and Sberbank (Savings bank of Russia) is looking to tap new style Tier 2 notes as Russian banks prepare to improve capital for Basel 3.

US high-yielding bonds — although looking relatively expensive — could eventually grind tighter on the back of low default rates and staggering amounts of cash on US corporate balance sheets. Given low developing-market inflation rates, forthcoming emerging market elections and unabated volatility in this space, further US treasury strength cannot be ruled out. We advise a very cautious stance in emerging markets: we see value in South Korean credit and in Mexico — the latter for moderate risk profiles only.

Oil prices — Brent — added three per cent during the week, sustained by a decline in crude production in Libya, where output fell to between 450,000 and 500,000 barrels a day from 600,000 barrels the previous week, as protestors tampered with pipelines. WTI prices were sustained as well, due to harsh weather conditions in the US and to the release of weaker jobs data, triggering speculation of renewed stimulus discussion being on the table.

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