GCC markets sentiment holds up well, despite emerging market uncertainty
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GCC GCC markets have started 2014 on a strong note, with sentiment continuing to hold up well due to the region’s robust macro-economic fundamentals, despite downward pressure on global emerging markets. In the coming weeks, fourth-quarter earnings results will be the key driver of market direction, with annual dividend announcements also closely watched. Investors will also be looking to see whether market liquidity can remain strong, especially given the recent turmoil in some emerging markets. Investors in Saudi Arabia should be encouraged by the government budget for 2014, which shows a clear intention to stimulate the economy through increased investment spending of US$ 67 billion. This will not only support economic growth but also provide further opportunities to the private sector, through a number of measures to increase citizen employment. These measures, as well as increased unemployment benefits, will undoubtedly have a positive impact on consumption. The Saudi petrochemical sector is one to watch in the coming months, with a steady recovery in the world’s developed economies likely to result in price rises for key products over the rest of 2014. In the UAE, the economy is likely to continue to strengthen due to Dubai’s successful bid to host the EXPO 2020, coupled with the Abu Dhabi Government’s plans to increase investment spending by US$ 90 billion over the next five years. Continuing foreign inflows into Qatar ahead of the MSCI upgrade in June and the expected high dividend yields in Qatar and Oman are also positive drivers for investors. Africa Africa’s markets, with the exception of South Africa, have managed to sidestep the negative sentiment around global emerging markets and the region’s currencies have generally held steady. Nigerian bank stocks have taken a hit following the central bank’s decision to increase the cash reserve requirement on public sector deposits, which is in part seen as an effort to stabilise the naira currency – with investors believing that loan growth will be compromised. This reading seems mostly unjustified, and buyers have now started to come in to help bank stocks rebound. Upcoming earnings results may also remind investors that bank valuations are currently cheap. Sentiment in the Egyptian market is improving following progress on the new constitution, and hopes are rising that a smooth presidential election will be held. A decision by the country’s top military council to give the army chief, Field Marshal Abdel Fattah al-Seesi, a green light to seek election as president is likely to be regarded as positive by investors. A win by Seesi could prove to be a major catalyst for the market this year. Meanwhile, the improvement in the political situation and financial aid from the Arabian Gulf persuaded Fitch Ratings to raise Egypt’s economic outlook to stable from negative, according to the Egyptian Finance Ministry, while the country’s long-term foreign and local currency sovereign credit ratings were maintained at B-. While the Moroccan market is still yet to stir, frontier market investors could soon latch on to the fact that the economy is growing steadily. The country’s GDP grew by 4.4 percent in 2013, compared to 2.7 percent a year earlier, with growth in agriculture and the service sector compensating for a slowdown in mining and manufacturing. Economic growth this year is expected to moderate this year to 2.4 percent. Iraq The Iraqi market has been broadly flat this year, unaffected by ongoing political violence. The few notable outperformers have been Kurdistan International Bank and Baghdad Soft Drinks, which have both given strong double-digit returns. Baghdad Soft Drinks has reported strong results for the second year running, with net income up 23 percent. On the macro-economic front, 600 major projects worth US$ 189 billion remain frozen while the government continues to work on implementing its new funds management law. Meanwhile, oil exports stagnated in 2013, averaging 2.39 million barrels per day (mbpd), down by 0.3 mbpd from a year earlier, due to severe weather disruptions and upgrades to terminals. However, there are signs that foreign investors are still positive on the long-term prospects of the country. Abu Dhabi National Energy Company (Taqa) plans to invest about US$ 1.2 billion developing the Atrush oil and gas block in the autonomous Kurdistan region. It will invest more than US$ 300 million in the first phase of the project, with first oil from the 30,000 barrel per day (bpd) first phase expected in early 2015. Taqa won approval from the Kurdistan Regional Government (KRG) to develop the block in late 2013.
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Fixed income
Middle East credit markets have witnessed strong buying momentum since the beginning of the year, with money being put to work by many regional and international investors.
The absence of any new issuance has also helped to keep sentiment buoyant and the first regional issuer this year is scheduled to be KIPCO, which was on a road show for a U.S. dollar issuance at the end of January.
Regional banks, private banks, international accounts and other long term investors are providing demand for bonds in every segment of the regional credit curve. While the banks have focused on the shorter end of the curve to put their liquidity to work, international investors including pension funds and insurance companies have focused more on the longer end of the curve to enhance their returns. Similarly, private banks have focused on the high-yield segment and the longer-dated subordinated financial names to provide higher returns to their clients. Overall, market yields have compressed between 30-35 points across the curve over the last few trading sessions.
Middle East credit markets have witnessed strong buying momentum since the beginning of the year, with money being put to work by many regional and international investors.
The absence of any new issuance has also helped to keep sentiment buoyant and the first regional issuer this year is scheduled to be KIPCO, which was on a road show for a U.S. dollar issuance at the end of January.
Regional banks, private banks, international accounts and other long term investors are providing demand for bonds in every segment of the regional credit curve. While the banks have focused on the shorter end of the curve to put their liquidity to work, international investors including pension funds and insurance companies have focused more on the longer end of the curve to enhance their returns. Similarly, private banks have focused on the high-yield segment and the longer-dated subordinated financial names to provide higher returns to their clients. Overall, market yields have compressed between 30-35 points across the curve over the last few trading sessions.
Many names have suffered from a lack of offer- side liquidity and this has further exaggerated the price moves. In January, weak macroeconomic data flow from both the United States and emerging markets persuaded some investors to cash in on gains made in the first couple of weeks of the year. However, the markets remain strong and with new issuance cycle likely to kick off in the coming days, secondary market liquidity and overall sentiment is expected to remain positive in the near future. Also, with U.S. treasuries rallying due to safe haven bids primarily driven by concerns over weaker emerging market growth expectations, Middle East credit spreads have once again started to look attractive.
On the global markets front, the focus remains on the Federal Reserve’s actions and accompanied moves in U.S. treasury yields. Treasuries have had a strong start this year with the benchmark 10-year yields moving down by around 25 bps to 2.75 percent. The price gains were fuelled by rekindled interest in bonds after a battering last year as well as a disappointing December job report that showed the economy added much fewer jobs than expected. On the other hand, the
On the global markets front, the focus remains on the Federal Reserve’s actions and accompanied moves in U.S. treasury yields. Treasuries have had a strong start this year with the benchmark 10-year yields moving down by around 25 bps to 2.75 percent. The price gains were fuelled by rekindled interest in bonds after a battering last year as well as a disappointing December job report that showed the economy added much fewer jobs than expected. On the other hand, the
jobs report did not seem to diminish the central bank’s expectations for U.S. economic growth this year, and the Fed remains on track to trim its bond-buying programme for the second time in their FOMC meeting in the coming week.
Policy makers and the investor community will be closely monitoring incoming data for cue on the direction of rates.
Regional markets are expected to remain strong if global rates remain stable.
Policy makers and the investor community will be closely monitoring incoming data for cue on the direction of rates.
Regional markets are expected to remain strong if global rates remain stable.