Investors warm to fiscal moves by CBs
KFIC Report for Global and GCC Markets for September
Kuwait Finance and Investment Company (KFIC) clarified in its financial report for September; Global equity markets ended in positive territory during the quarter as the MSCI world index rose by +4.4 percent.
Investors reacted positively towards the prospects that global central banks would keep borrowing costs at historically low levels, with the Federal Reserve indicating that there is no urgency to raise interest rates until December 2016 at the very least. US equities, led by the S&P 500 index, gained +3.3 percent during the quarter and the Dow Jones Industrial Average rose +2.1 percent.
US economic growth was weak in the first half of the year, but there is more evidence during the recent quarter that the economy is expanding as per the latest GDP and consumer confidence figures. In Europe, markets rose significantly led by Germany’s DAX index by +8.6 percent, followed by UK’s FTSE 100 by +6.1 percent and France’s CAC 40 gained +4.9 percent. The ECB has continued to add more stimulus and quantitative easing (QE) measures as the economic recovery process steepens. There are further indications that Brexit is affecting profitability of UK producers, as the Bank of England has responded by lowering interest rates and restarting QE.
MSCI Emerging Markets (EM) index increased +8.3 percent led by Brazil’s Ibovespa which gained +13.3 percent after Brazil’s stocks and currency surged amid optimism that president Michel Temer can trim a budget deficit and restore confidence in a struggling economy. China’s Shanghai market increased by +2.6 percent QTD as the National Bureau of Statistics reported that industrial firms profits soared +19.5 percent compared the year-earlier data, while the Chinese PMI remained at 50.4, which maintains its expansionary status. Japan’s Nikkei rose +5.6 percent as the Financial sector reacted positively towards the Bank of Japan decision to introduce new policies regarding an inflation target of +2 percent or above and targeting a zero 10-year JGB (Japanese Government Bond) yield. Oil prices ended the quarter in negative territory as WTI fell by -3.8 percent to close at $48.2/bbl and Brent dropped -1.7 percent to close at $50.2/bbl.
OPEC ramped up output levels with excess supply coming from Nigeria and Iraq, after both countries had previously faced disruptions, and Saudi Arabia has kept production levels close to record highs. However, there is more optimism for oil prices following OPEC’s preliminary agreement to cut production as the final details will be disclosed in an official formal meeting in November.
Saudi budget deficit
Saudi Arabia’s budget deficit is expected to narrow to approximately 10 percent of GDP in 2017 amid fiscal adjustments underway, according to the IMF. In another recent decision taken this month, Saudi Arabia canceled bonus payments for state employees and cut ministers’ salaries by -20 percent. In Kuwait, there have been calls to review the public sector wage bill, as stated by Khalifa Hamada, undersecretary to the finance minister and to implement a fiscal reform policy which can help Kuwait’s economy adjust to low oil prices.
In UAE, solid non-oil private sector growth was witnessed in August, as per the latest Emirates NBD UAE PMI data. The health of the sector was reflected by further growth of employment and purchasing activity, with the latter picking up to a nine-month high. Qatar’s economy has been able to weather low oil prices due to strong macroeconomic fundamentals including a low fiscal break-even price, significant accumulation of savings, and low levels of public debt, QNB has said in its ‘Qatar Economic Insight’ report. Oman’s economy is showing signs of slowing as consumer confidence has weakened, government projects have been cut, and market conditions remaining bearish, according to an Gulf News. Bahrain has launched major reforms to diversify its economy with large budget deficits expected in 2016 and pressure from rating agencies that have deemed Bahrain in junk category.
GCC equities ended negative during the quarter as the MSCI GCC IMI index fell by -5.9 percent. Qatar’s QE index was the top performing regional index, followed by Dubai’s DFM index and Bahrain’s BB All Share Index. Saudi Arabia’s Tadawul Index fell -13.5 percent with negative contribution across sectors. Lagging sectors included Hotels -25.9 percent, Telecom 19.5 percent, Transport -19.8 percent, and Banking -12.0 percent.
Qatar’s All Share Index was the top regional performing market as it increased by +5.6 percent on a quarterly basis, with positive attribution witnessed in Insurance +13.6 percent, Banks +7.8 percent and Telecom +7.5 percent. In UAE, positive earnings surprise and stronger investment sentiment contributed to a modest quarterly gain of +4.9 percent. Dubai’s DFM index advanced +4.9 percent with positive contribution reported across most sectors. The top performing sectors included: Real Estate +7.3 percent, Transport +7.2 percent, and the worst performing sector was the Services industry which dropped -15.1 percent. Abu Dhabi’s ADSM index fell -0.5 percent with negative performance coming from Consumer Staples -15.1 percent, and Industrial -6.7 percent. Positive performance in ADSM index was seen in Telecom +5.5 percent, and Real Estate +0.2 percent. Bahrain’s BB All Share Index rose +2.8 percent with positive attribution from Banks +2.7 percent and Industries +6.2 percent. Kuwait’s weighted index jumped +1.0 percent which is directly linked to good performance in Financial Services +6.7 percent, Real Estate +0.7 percent, and Banks +0.6 percent. Oman’s MSM 30 fell -0.9 percent as Services fell by -3.9 percent.