KSA up as EM in­clu­sion draws closer

Kuwait Times - - BUSINESS -

KUWAIT: Re­gional equities re­treated in 2017, con­tin­u­ing to un­der­per­form in­ter­na­tional mar­kets, with the ex­cep­tion of Saudi Ara­bia. The MSCI GCC ex-Saudi Ara­bia price in­dex de­clined 5.2 per­cent on the quar­ter, with most re­gional mar­kets clos­ing in neg­a­tive ter­ri­tory amid notably lower vol­umes. Saudi’s per­for­mance, how­ever, was boosted late in the quar­ter, with its in­dex up 7 per­cent in 2017, af­ter MSCI put it on a watch list for pos­si­ble in­clu­sion in the emerg­ing mar­ket in­dex. To­tal GCC mar­ket cap­i­tal­iza­tion stood at $971 bil­lion at the end of the quar­ter, hav­ing added $17 bil­lion dur­ing 2017, on the back of the Saudi rally.

In­ter­na­tion­ally, most eq­uity mar­kets continued to ad­vance, mak­ing new highs de­spite los­ing some of their mo­men­tum. Noth­ing seemed to stop the rally in in­ter­na­tional equities that started last Novem­ber with the elec­tion of Pres­i­dent Trump. Equities have since shrugged off a hand­ful of po­lit­i­cal, se­cu­rity and eco­nomic set­backs. The MSCI ad­vanced mar­ket in­dex was up 2 per­cent in 2017 and 13 per­cent since Novem­ber’s elec­tion. US equities continued to be buoyed by prom­ises of more busi­ness-friendly poli­cies al­beit be­ing less hope­ful on the tim­ing.

Euro­pean equities continued to take the lead from US mar­kets, lit­tle af­fected by events that could have weighed on sen­ti­ment. Brexit de­vel­op­ments, ter­ror­ist at­tacks, bank and Greek debt is­sues had lit­tle last­ing im­pact on stocks. In­stead, in­vestors chose to fo­cus more on the pos­i­tives, in­clud­ing a steady flow of solid eco­nomic data from core economies, the elec­tion of a proEU and pro-busi­ness pres­i­dent in France and a cen­tral bank com­mit­ted to pur­su­ing an ac­com­moda­tive mon­e­tary pol­icy de­spite strength­en­ing eco­nomic con­di­tions. The Euro Stoxx 50 was down 1.7 per­cent on the quar­ter, but re­mains up 4.6 per­cent year-to-date.

Emerg­ing mar­kets (EM) continued to out­per­form as for­eign in­flows picked up. The MSCI EM in­dex was up 6 per­cent in 2017 as fears of more pro­tec­tion­ist US trade poli­cies took a back­seat. Emerg­ing mar­kets, along with other risky asset classes, ben­e­fit­ted from the continued flow of pos­i­tive data from ad­vanced economies. Flows to these mar­kets picked up sup­ported by easy mon­e­tary poli­cies by the ma­jor cen­tral banks and a grad­ual pre­dictable path for Fed rate hikes. In­deed, the lat­est Fed hike in June was al­most en­tirely priced in by mar­kets. Ac­cord­ing to the IIF, net port­fo­lio flows to emerg­ing mar­kets to­taled $41 bil­lion in the first two months of 2017, bring­ing the six­month mov­ing av­er­age to $25 bil­lion for the first time since Novem­ber 2014.

GCC mar­kets end in neg­a­tive ter­ri­tory

GCC mar­kets bucked the trend and continued to un­der­per­form with most end­ing the quar­ter in neg­a­tive ter­ri­tory. Sen­ti­ment in the re­gion re­mained closely linked to oil prices which fell be­low $50 per bar­rel de­spite the re­cent ex­ten­sion of pro­duc­tion cuts by OPEC. Amid low oil prices, on­go­ing fis­cal con­sol­i­da­tion and some sovereign rat­ing down­grades, busi­ness and con­sumer con­fi­dence has re­mained sub­dued. This, in turn, weighed on eq­uity prices with the MSCI GCC ex-Saudi price in­dex re­treat­ing 5.2 per­cent in 2017.

The ex­cep­tion were Saudi shares which ral­lied as MSCI an­nounced the po­ten­tial in­clu­sion of the mar­ket in its emerg­ing mar­kets in­dex and the King el­e­vated his son to crown prince. On 20 June, MSCI an­nounced that it was plac­ing the Saudi mar­ket on its EM watch list. The an­nounce­ment came on the heels of a series of stock mar­ket re­forms. Adding Saudi shares to its EM in­dex could re­sult in $9 bil­lion, or 2 per­cent of mar­ket cap, in pas­sive in­flows. In­clu­sion in the in­dex is ex­pected in mid2019, if not ear­lier. Saudi shares jumped 5 per­cent in the first trad­ing ses­sion af­ter the an­nounce­ment, which co­in­cided with the news that Mo­hammed Bin Sal­man was el­e­vated to crown prince.

Mean­while, cor­po­rate earn­ings an­nounce­ments did not pro­vide much sup­port to eq­uity prices in 2Q17 across the GCC. The growth in 1Q17 prof­its of 630 listed GCC com­pa­nies was strong at 18 per­cent y/y. Profit an­nounce­ments were also bet­ter than ex­pected with a sam­ple of com­pa­nies an­nounc­ing earn­ings that were on av­er­age 3 per­cent higher than ex­pec­ta­tions. But mar­kets seemed un­fazed by ei­ther the strong re­sults or re­duced val­u­a­tions that now look quite at­trac­tive.

Po­lit­i­cal rift ef­fects Qatar

Qatar un­der­per­formed re­gion­ally with the on­go­ing po­lit­i­cal rift with its neigh­bors hit­ting equities hard. Qatar’s gen­eral in­dex de­clined 15 per­cent in 2017 hav­ing dropped more than 7 per­cent the day Saudi Ara­bia, the UAE, Bahrain and Egypt an­nounced that they would sever ties with the emi­rate. The po­lit­i­cal cri­sis hurt con­fi­dence in Qatar, rais­ing eco­nomic and fi­nan­cial con­cerns, and trig­ger­ing down­grades to the state’s rat­ing. The per­for­mance of Qatari equities was weak for month seven be­fore the cri­sis. The sec­ond tranche up­grade by FTSE to EM sta­tus in midMarch failed to pro­vide much up­lift. Also, an MSCI in­dex re­bal­anc­ing in May saw a net out­flow of for­eign funds from Qatar for the first time in 16 months.

Ac­tiv­ity in re­gional mar­kets weak­ened notably with all mar­kets see­ing de­clines in turnover. The daily traded value av­er­aged $1 bil­lion down 30 per­cent com­pared to the pre­vi­ous quar­ter. Kuwait saw the sharpest drop in ac­tiv­ity fol­low­ing an ex­cep­tion­ally strong first quar­ter. Re­gional ac­tiv­ity de­clined fur­ther as the sum­mer sea­son and Ra­madan ap­proached.

For­eign flows to the re­gion also saw a sharp drop. Ac­cord­ing to EFG Her­mes, in­flows to the re­gion av­er­aged $126 mil­lion in the first two months of 2017, down 70 per­cent com­pared to its 1Q17 av­er­age. In­deed, part of this big drop was due to Qatar’s FTSE up­grade which saw a sharp rise in flows to the mar­ket in March. Mean­while, flows to GCC mar­kets and mar­ket liq­uid­ity more gen­er­ally have been im­pacted by the rise in re­gional debt is­suances, as banks and sov­er­eigns tapped debt mar­kets.

Re­gional equities will con­tinue to be driven to a large ex­tent by de­vel­op­ments in oil mar­kets and progress on fis­cal ad­just­ment and struc­tural re­form. Re­gional pol­i­tics will also be mon­i­tored closely and will have an im­pact, prob­a­bly on some mar­kets more than oth­ers. In­ter­na­tion­ally, progress on tax re­form and in­fras­truc­ture spend­ing ini­tia­tives in the US will be closely watched, while mon­e­tary pol­icy in ad­vanced mar­kets will con­tinue to be a key fo­cus for in­vestors.

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