Calm down; dip in US technology equities not a bear signal
Us stocks, specifically in the biotechnology and Internet sectors, which have outperformed the broader markets for the last six months, took a breather last Friday. Is this the start of a bear market? We think not. But US markets need further reassurance in the earnings season starting this week. They will likely get that reassurance.
High-dividend equities are in vogue in GCC markets, as the bulk of dividends will be paid to investors holding stocks throughout April. Once market participants become eligible for dividends, they are likely to liquidate their holdings and look for other highyielding investment opportunities, as is customary in the region and given recent equity market gains. This could result in a rotation towards growth names in the GCC region starting late this month.
This could keep the regional bond and credit markets well-bid as new issues of bonds and credits remain sparse. The S&P Pan Arab Composite index gained 1.4 per cent a week ago.
In the UAE, real estate names are expected to be a key beneficiary of the MSCI upgrade this May, given its large weighting that makes it a key holding for tracker funds looking to gain exposure to UAE bench- marks. We would expect foreign institutional investors to favour large-cap equities with relatively lower valuation multiples and greater visibility in terms of project pipeline.
One emerging-market country where there is renewed interest by investors is India. GDP numbers are poised to grow sub-five per cent for this year and inch up to 5.50 per cent to 5.75 per cent for fiscal year 2015. The current account deficit and forex reserves have shown consistent improvement due to the implementation of various reforms and policies. In terms of new issuance pipeline, State Bank of India, or SBI, and Oil India have mandated banks for a bond sale. The investor roadshow began last week for SBI whilst the investors meeting for Oil India concluded in London. We urge all our interested clients to place orders as we expect strong interests for these transactions.
Global equity markets were up nicely for the week, but US benchmarks — which have so far led the global rally — retreated abruptly on Friday after touching record highs: the S&P 500 was down 1.25 per cent and the tech-heavy Nasdaq 2.6 per cent. Momentum stocks — or the stocks that gained the most in 2013 — were hit the hardest: biotechnology, technology and small caps lost more than the S&P 500. These losses can be put down to profit-taking ahead of the earnings season — kicking off this week — after the recent bull-run, considering that US companies have lowered their guidance considerably since the beginning of the year and that weather in the first quarter must have contributed to earnings volatility.
Companies are expected to report earnings a tad weaker versus the same quarter the previous year for a slightly higher revenue. While one could argue that corporations are talking down numbers in order to be able to shine during the reporting time, what is slightly more worrying is that the best performing sector year-to date is utilities, up a whopping nine per cent yearto-date.
This means investors are flocking to defensive stocks and are not prepared to take additional risk at current market levels.
Even though a pullback may be in the cards if earnings disappoint, one should bear in mind that equity markets should be bought on weakness. The overall macro environment remains supportive, both in terms of economic data — which recently firmed in the US, were on track in Europe and not below expectations in China — and of central bank policies, always supportive against a non-inflationary backdrop.
An authoritative voice raised some concern that the European Central Bank is not doing enough to address the euro region’s risk of deflation.
Christine Lagarde, the International Monetary Fund Managing Director, said that prolonged ultra-low inflation in advanced economies may cloud the global economic outlook and thus gave explicit advice to the ECB in the direction of more monetary easing. In case the European inflationgrowth profile deteriorates further quantitative easing will eventually be adopted, a major positive for European equities.
Developed bond markets in general underperformed their emerging counterparts: given the “risk on” sentiment, Turkey, Russia, Brazil and Mexico were tighter by 10bps to 15bps. Italian, Spanish and Portuguese bonds also strengthened 10bps to 22bps and Portugal led the outperformance; overall bond yields in the EU fell to record lows on expectation the ECB will eventually be forced to adopt QE. Spanish five-year yields ended up almost on a par with US five-year Treasury yields.
Ukraine’s credit rating was cut by Moody’s, one notch downgrade to Caa3. Moody’s cited escalating political tensions and the withdrawal of Russian financial support rose concerns for the country’s fiscal strength. The sovereign’s outlook remains negative.