Buy GCC and global high-dividend stocks; Qatar equities still offer value ahead of MSCI upgrade; China: weak PMI numbers and tightening of liquidity; global pharma M&A activity robust; good entry point for platinum coming up
GCC markets maintain their positive momentum as we approach the end of April, supported by strong earnings across the region. In the UAE, the real estate and banking sectors out-performed analyst expectations. In the US, two-thirds of companies reported above-consensus earnings. Underperformers this week are China on the back of credit tightening and lower PMI numbers and Russia as tensions with Ukraine continue.
Several factors continue to propel UAE equities higher. These include:
Increased Foreign Ownership limits for selected stocks
Overall positive earnings performance in the first quarter of 2014
Increased dividend payouts and
Distribution of bonus shares
Daily trading volumes in UAE bourses exceed USD 1bn; these are comparable to the last equity bull-run in the pre-2009 period. UAE real estate continues to be in favour with launches at Cityscape Abu Dhabi generating considerable local and foreign interest, backed by increases in the quantity of land transactions and resilience in earnings from recurring mall and hospitality sector properties. On average, net income in the banking sector grew c.20% over the same quarter last year.
Elsewhere, we maintain our theme of investing in high-dividend stocks and focus on select Qatar, Saudi Arabian and European names. Add to positions in Saudi during the expected seasonal summer dips.
Qatar is one of the fastest growing markets in the GCC with GDP growth forecasts for 2014 of 6.3% (vs. 4.6% for UAE) supported by a substantially higher public investment budget for this year. Hydrocarbon revenues are helping maintain a large current account and fiscal surplus. The Qatari banking sector outlook remains positive as bank lending is expected to rise with accelerated investment spending in the non-hydrocarbon sector (USD 285bn in civil infrastructure over the next 10 years). The banking sector has an average capital adequacy ratio of 16% and ROE of 16%. An increasing expat worker community combined with high per capita incomes for Qatari nationals is leading to growing domestic demand; domestic bank credit growth is expanding in double-digits.
Though the Qatari equity index is up 25% this year, valuations are below the MSCI World Index and earnings for Qatari companies are growing strongly ahead of MSCI EMEA inclusion. We recommend a diversified basket of Qatar equities that includes Qatar National Bank, Doha Bank, Ooredoo (telecom) and Industries Qatar (petrochemicals), which additionally provides an annual yield of 5%. The weighting of these 4 stocks in the Qatari index is 45% and should comprise 2% of the MSCI EMEA Index post-inclusion.
Deal fever is gripping the global pharma industry with takeover battles and mergers leading to a rally in the sector. A favourite takeover target is Allergan, the makers of Botox. We expect to see continued interest in the pharma M&A space.
In global emerging bond markets, Ukraine loomed large. Investors de-leveraged bond holdings in the Russian federation. However, other Eastern Europe sovereigns continue to be well supported despite short positions building up. Slovenia, Croatia, Hungary, Romania, Serbia were a mixed bag of trading last week, as volatility remained elevated.
The much awaited sovereign bond issuance in the GCC finally took place, with Dubai's department of finance pricing its maiden long dated 15 year Sukuk (USD 750m) at a coupon of 5%. Abu Dhabi's Mubadala also issued a USD 750m 8-year bond at a coupon of 3.25%, which amounted to 120 bps over the 7-year treasury benchmark; the book was over-subscribed at $5bn. Next in the pipeline is Abu Dhabi insurer Taqa which has mandated its banks to carry out a series of fixed income investor meetings in Asia, Europe and the US.
Despite this new issuance, demand still exceeds supply for GCC sovereign names. Mubadala sees USD 1.25bn maturing bonds next month whilst TAQA has USD 1.2bn coming due in Sept 2014. Saudi Telecom had also mandated banks for a potential Sukuk sale – it remains unclear if the issuer will issue in local currency or USD. The international investor base would prefer more USD-based issuance given the scarcity of the kingdom's bonds issued in USD.
Platinum prices moved down on the back of positive news flowing from the mining sector in South Africa, with expectations on wage settlements with striking workers. We continue to believe that the fundamental demand story for platinum remains positive and levels between USD 1350 to USD 1380 would be a good entry point for investors. Investors could look at investing in Platinum through ETFs.