Trade war, geopo­lit­i­cal jit­ters weighed on eco­nomic sen­ti­ment in 2018

Kuwait’s eco­nomic fun­da­men­tals re­main strong

Kuwait Times - - Business -

KUWAIT: Kuwait Fi­nance and In­vest­ment Com­pany (KFIC) re­leased its re­port for De­cem­ber 2018 which dis­cusses the sta­tus of lo­cal and in­ter­na­tional mar­kets.

In­ter­na­tional eco­nomic over­view: In­ter­na­tional eco­nomic sen­ti­ment has weak­ened through­out 2018 mainly due to trade war ten­sions, geopo­lit­i­cal ten­sions, im­pli­ca­tions of Brexit, and over­sup­ply in oil mar­kets. More­over, strength in the USD con­tin­ues to place pres­sure on debt heavy emerg­ing mar­ket economies. Ac­cord­ing to Ox­ford Eco­nomics, World GDP is ex­pected to fall to +2.76 per­cent in 2019 from +3.02 per­cent in 2018. The big­gest risks are a rise in trade pro­tec­tion­ism, as el­e­vated trade wars and pro­tec­tion­ism be­tween US and China has re­sulted to large down­side risk to global growth ex­pec­ta­tions. Con­cerns sur­round­ing trade ten­sions and tar­iffs has also dis­rupted global sup­ply chains. In ad­di­tion, Global Man­u­fac­tur­ing PMI level read­ings are at their low­est level since Novem­ber 2016 as it is cur­rently hov­er­ing near 52.0 and has de­clined from 54.0 from the be­gin­ning of 2018. Most re­cently, China’s PMI fell below 50 for the first time in nearly two years as the world’s sec­ond largest econ­omy falls into a bear mar­ket. In Europe, the po­lit­i­cal tur­moil be­tween the EU and UK could ig­nite a cri­sis in busi­ness con­fi­dence as Brexit ne­go­ti­a­tions re­main un­der­way.

GCC Eco­nomic Over­view

GCC na­tions en­dured mixed eco­nomic high­lights dur­ing the year as ef­forts re­main un­der­way to shift from oil rev­enue re­liance to non-oil rev­enue sources. Saudi Ara­bia is set to adopt an ex­pan­sion­ary pol­icy head­ing into 2019 as spend­ing is set to in­crease by +7 per­cent YoY with pro­jected ex­pen­di­ture amount­ing to SAR 1.1 tril­lion. Rev­enues are set to grow by +9 per­cent YoY to SAR 975bn, driven pri­mar­ily by sub­stan­tial growth in non-oil rev­enues such as VAT and higher ex­pat levies. Spend­ing in KSA is mostly driven by cap­i­tal ex­pen­di­tures, which is set to rise to SAR 246 bil­lion and rep­re­sents a +20 per­cent in­crease as com­pared to 2018. The 2019 bud­get fo­cuses mostly on in­vest­ments in in­fra­struc­ture and en­ter­tain­ment in­dus­tries and poli­cies to sup­port the pri­vate sec­tor in tourism and helps em­power Small to Medium En­ter­prises (SMEs). KSA has scaled down sig­nif­i­cantly on Mil­i­tary and Ed­u­ca­tional ser­vices. In ad­di­tion, MSCI EM up­grade is un­der­way as of June 2019 and an­tic­i­pated FTSE in­clu­sion as of March 2019. In Kuwait, the eco­nomic fun­da­men­tals re­main the strong in the re­gion and gov­ern­ment reg­u­la­tions and eco­nomic poli­cies sug­gest an ex­pan­sion­ary tone.

Kuwait has also been in­cluded in the lat­est FTSE EM up­grade which is a pos­i­tive im­pe­tus mostly for Kuwaiti banks. Kuwait is also be­ing con­sid­ered for MSCI in the 2019 an­nual mar­ket clas­si­fi­ca­tion re­view as of June 2019, which could po­ten­tially re­clas­sify it from Fron­tiers Mar­ket to Emerg­ing Mar­ket sta­tus and pos­si­bly at­tract more than $1 bil­lion in for­eign in­flows. In UAE, VAT con­trib­uted more than AED 12 bil­lion to rev­enues in 2018 as the em­pha­sis re­mains to boost non-oil in­come and nar­row the bud­get deficit. UAE real es­tate prop­erty prices also tum­bled in 2018 as prices fell by -5.8 per­cent on a yearly ba­sis. The real es­tate mar­ket has been plagued with be­ing over­sup­plied, weak de­mand, and im­pli­ca­tions of VAT on dis­pos­able in­come. In Qatar, the coun­try re­voked for­eign own­er­ship lim­its as it al­lowed for­eign­ers to own 100 per­cent of busi­nesses in all eco­nomic sec­tors. The gas-rich coun­try re­mained re­silient to the GCC block­ade and has main­tained strong eco­nomic per­for­mance through­out 2018 due to healthy fis­cal re­serves. In Oman, the coun­try re­mains on road to re­cov­ery as GDP fore­casts point to­wards higher growth in 2019. The min­istry of tourism has stated that con­tri­bu­tion of tourism to GDP will rise to 10 per­cent in 2019 from 6 per­cent in 2018. Bahrain re­mains the most vul­ner­a­ble out of all GCC states as the coun­try has the high­est lever­age among peer groups with a Debt to GDP ra­tio of 90 per­cent (vs World Debt to GDP of 60 per­cent).

Mar­kets over­view In­ter­na­tional mar­kets ended the year in bear­ish ter­ri­tory due to weaker global growth tra­jec­tory, trade war ten­sions, and uncer­tainty in cor­po­rate earn­ings guid­ance as the MSCI World in­dex fell -10.0 per­cent year to date (YTD). China’s Shang­hai’s in­dex was the worst per­form­ing global mar­ket as com­pared to the other heavy­weight world in­dices. In the US, the S&P 500 de­clined by -6 per­cent as in­vestors have been wor­ried by trade pro­tec­tion­ism poli­cies with China, an po­ten­tial yield curve in­ver­sion, and weaker global growth sen­ti­ment.

Fed­eral Re­serve chair­man Jerome Pow­ell has stated that the out­look for the US econ­omy re­mains “solid” and in­ter­est rates are just below the neu­tral range, sug­gest­ing that there will be less an­tic­i­pated in­ter­est rate hikes in 2019 and be­yond. In Europe, Ger­many’s DAX dropped by -18 per­cent as PMI data con­tin­ued to dis­ap­pointed an­a­lysts and man­u­fac­tur­ing data has been dragged lower by time-con­sum­ing car emis­sions ex­am­i­na­tions. France’s CAC 40 fell by -11 per­cent as po­lit­i­cal con­cerns con­tin­ued to over­shadow Euro­pean mar­kets after the Euro­pean Cen­tral Bank (ECB) re­jected the Ital­ian gov­ern­ment’s bud­get plan and ask for re­vi­sions to be made to the fis­cal tar­gets.

UK’s FTSE 100 fell -12 per­cent as in­vestors are await­ing to see if British law­mak­ers will de­cide to ac­cept prime min­is­ter May’s plans for a “soft” exit and keep rel­a­tively close eco­nomic ties with the EU, or to re­ject it com­pletely in fa­vor of a “hard” Brexit. The fi­nal de­ci­sion is set to be made on March 29. In China, Shang­hai Com­pos­ite fell by -20 per­cent in 2019 as trade war ten­sions in­ten­si­fied as Don­ald Trump has pro­posed to place up to 25 per­cent tar­iffs on im­port goods worth up to $500 bil­lion. China has stated that they are ready to re­tal­i­ate, and no deal has been agreed upon yet. In Ja­pan, Nikkei 225 fell by -17 per­cent as it en­tered bear mar­ket ter­ri­tory for the year. The eq­uity mar­kets are pric­ing in con­cerns over a slow­down in the global econ­omy and a down­ward re­vi­sion to cor­po­rate earn­ings in ad­vance. Ja­pa­nese stocks have been caught in a global mar­ket bear mar­ket, mainly driven by con­cerns about ev­ery­thing from the US China trade war to global cen­tral banks’ moves to tighten mon­e­tary pol­icy.

Sen­ti­ment has sig­nif­i­cantly weak­ened, with for­eign in­vestors sell­ing bil­lions of dol­lars in the coun­try’s shares. In com­modi­ties, oil prices re­traced as Brent dropped by -19.2 per­cent to close at $54.3 bb/l and WTI fell by -24.3 per­cent to close at $45.4 bb/l. There have been con­cerns over a global sup­ply glut as US has be­come the world leader in oil pro­duc­tion, over­tak­ing Saudi Ara­bia and Rus­sia to pro­duce more than 11 mil­lion bpd. US trade war ten­sions has also led to con­cerns that global de­mand will fall as cor­po­rate earn­ings could stall. OPEC is cur­rently in ef­forts to re­duce the global sup­ply glut as 1.5mn bpd have been re­moved from the mar­ket since De­cem­ber 2018.

Note: Sources— KFIC Re­search, Bloomberg, Reuters, GulfNews, KUNA, JPM Chase, S&P, IMF, Ox­ford Eco­nomics.

The Im­pli­ca­tions of Brexit caus­ing a weak­ened in­ter­na­tional eco­nomic sen­ti­ment

GCC na­tions con­tinue ef­forts to shift re­liance from oil rev­enue to non-oil rev­enue re­sources.

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