A not-so-thrilling roller-coaster ride

After strong start to 2015, equities pull back on several global economic cues.

The year 2015 can be marked by increased volatility across asset classes. The first half of the year cherished global sell-off in equities on back of a bullish US market that reached a six-year high in March 2015.
However, the past four to five months witnessed more bearish sentiments due to the slowdown in China, which had a cascading effect on the global economic growth. The Chinese economy, which represents only 13 per cent of world GDP, contributes nearly one-third to global economic growth.
Moreover, the country accounts for more than a quarter of the world's saving as well as investments (the same size as the US and Europe combined), and it is the home of the world's four largest banks by assets.
Clearly, the impact of the Chinese economic slowdown outweighed the US bullish run, which was evident from Fed's decision to defer the normalisation process, especially by citing "international developments" as a reason for holding off a rate hike in mid-2015.
Moreover, given that the Chinese economy is transitioning from an investment-led to a consumption-based economy, hence returning to the growth seen previously will not happen in the next two or three quarters, but perhaps might take a couple of years. This means that the world will have to absorb slowing growth in China and accordingly, adjust to new realities going forward.
Equity markets
The performance of equity markets in 2015 was mostly positive as investors focused on measures taken by central banks to stimulate demand in an uncertain macroeconomic environment.
The Shanghai index was up 8.5 per cent on a year-to-date basis in 2015 as investors believe that the sharp sell-off in the Chinese equities have led to buying opportunity since the valuations have come off significantly (since peaking in May 2015) to more compelling levels, especially for companies with strong fundamentals and low gearing ratios.
Japan's Nikkei and Germany's DAX were other markets that closed green, up by 6.4 per cent and 5.78 per cent, respectively, for the year. US markets are likely to close lower for the year after peaking in March as investors expect a pullback after a bull run that started in 2009.
On the other hand, Mena markets went through a roller-coaster ride and despite a positive start to the year, crumbled to multi-year lows in the latter half of 2015. Economic slowdown in China coupled with the Opec's decision to maintain/increase production levels, which essentially translates to consistently lower oil prices, and lack of corrective measures from the central bank and the government weighed drastically on the investor sentiments.
Consequently, the Dow Jones Mena Index declined by around 16 per cent on a year-to-date basis in 2015. Egypt was the worst performer, down by 28.8 per cent on a year-to-date basis, followed by Qatar (down 17.9 per cent) and Dubai (down 18.75 per cent). Interestingly, even though world equity markets started to rebound (after two consecutive months of losses) in October, regional equities remained under pressure and continued their downward trajectory.
Despite being the most diversified economy, the UAE also felt selling pressure on the back of weakening oil prices and slowing growth. Dubai was down by 18.75 per cent on a year-to-date basis in 2015 and Abu Dhabi by 11 per cent. The relative outperformance in Abu Dhabi was largely due to etisalat, which had appreciated after being included in the MSCI Emerging Market index.
Both UAE indexes were dragged lower by the financial and real estate sector. Banks in the UAE started to feel the liquidity pressure, while real estate come off its peak due to a mix of domestic factors and selling pressure from foreigners to capitalise on the expected recovery in the developed markets.
Saudi Arabia's main index was down by around 20 per cent, dragged lower by the financial and petrochemical sectors, which collectively account for around 50 per cent of the total market. Uncertainty in oil prices was the key determinant for this negative performance.
On the other hand, Qatar's index was down by 17.9 per cent in 2015 primarily due to the MSCI Emerging Market index rebalancing and the overall negative sentiments in the region. Notably, Qatar will continue to be one of most preferred markets on the back of government thrust and ability to continue its massive infrastructure spending.
Fixed income
Globally, bond-buying activity in 2015 painted a mixed picture as investors were primarily driven by domestic factors coupled with the weakness in the equity and commodities market. The divergent monetary policies by the two largest central banks in the world, the Fed and the ECB, also played an important role.
The yield on 10-year government bonds remained buoyant in the US and UK, as the Fed and BoE were expected to hike interest rates, which led to a decline in yields during the year. The yield on 10-year German bonds mostly remained subdued in 2015 as poor market dynamics compelled investors to switch to bonds from equities as a safe heaven. The yields on Japanese government bonds dropped during the second half of 2015 as the economic environment reflected signs of deterioration in business confidence and renewed inflationary pressures.
The five-year credit default swap, or CDS, spreads in the Mena portrayed a mixed performance due to considerable differences in country-specific economic fundamentals. However, Mena CDS spreads increased across the board in November amidst the renewed fall in oil prices coupled with lack of government initiatives to boost revenues for a prolonged period.
The rising fear indicates that investors are concerned about widening deficits coupled with domestic factors and geopolitical environment in the region. In the UAE, CDS spreads were mixed as Dubai witnessed a decline, while Abu Dhabi saw a marginal rise in spreads. In Egypt, the CDS spread continued to remain at elevated levels throughout 2015, as domestic concerns coupled with security fears weighed heavily on the country's finances. In Saudi Arabia, the five-year CDS soared the highest to as much as 149 bps last month, from around 60 bps in June 2015, as a widening budget deficit and dwindling reserves led to rising fears of government's ability to continue with their ambitious spending plans.
Although 2015 was a disappointing year (that many of us would like to forget and move on) for Mena capital markets, it also presents a silver lining: valuations in particular have fallen down during the recent sell-off, potentially providing an attractive entry point for investors.
Furthermore, with stable earnings by corporate and valuations catching up with fundamentals, the total return prospects for equities will be increasingly promising for the regional markets. Furthermore, the UAE and Qatar will remain the most preferred regional markets, given their resilience and government's ability to boost non-oil sectors to offset the decline in hydrocarbon revenues.
The writer is the founder and chief executive officer of Al Masah Capital Management. Views expressed are his own and do not reflect the newspaper's policy.