GCC corporate earnings average 12 percent annualized in Q1 2014; crude Oil prices could become a risk late in 2014; lack of new issuance sustains UAE bond prices; expect higher US treasury yields and a stronger dollar by late 2014
The optimistic tone of GCC stock markets is being translated into strong economic momentum. The UAE and Saudi both reported healthy PMI data of 58.3 and 58.5 respectively, firmly in expansion territory. In the case of the UAE, this is the highest recorded level to date. The IMF is considering revising its GDP forecast upwards, from the current 4.4 per cent, which is below the Emirates NBD forecast of 4.7 per cent and the Institute of International Finance forecast of 5.2 per cent.
Most UAE blue chip companies have reported Q1 2014 results. Whilst strong y/y net income growth was expected, a majority of companies have also reported double-digit net income growth q/q. More importantly, on average, net income has been 18 per cent higher than consensus estimates, indicating that analysts could upgrade their earnings and price targets. Whilst trading activity will become quiet as we approach the Holy Month and summer, we view any dips as buying opportunities for investors who have a medium term view.
Our preference over the summer months would be a defensive strategy in sectors like telecoms where regional companies like Zain and Mobily exhibit strong cash flows supporting attractive dividend yields. We also like Ooredoo for the same reasons plus the fact that it is a strong candidate to be part of the upgraded Qatari componenet of the MSCI Emerging Markets index. From a global economic growth perspective we favour the petrochemicals sector, specifically SABIC and Tasnee, which should benefit respectively from a rebound in global demand for petrochemical products and titanium dioxide.
We remain cautious on EM bonds
Dovish statements by Janet Yellen – the Fed President – and the positive stance by President Putin on the Ukrainian conflict helped bond markets as investors turned less risk-averse. Emerging markets staged a rebound whilst new issuance momentum continues. Global investment grade issuance has topped $370 billion whereas the GCC total stands just under $9 billion; it is worthwhile noting that $18.2 billion of GCC debt is maturing this year, thus scarcity of new GCC credits adds to their appeal.
Russia took the lead as the outperformer over the preceding week, with 10-year sovereign yields tightening 66 bps, while Ukraine tightened 65 bps, followed by Indonesia (-35 bps) and Turkey (-16 Bps). We advise investors to remain selective in emerging bond markets as military tensions escalate in Ukraine and the South China Sea.
ICD – Investment Corporation of Dubai – the investment arm for Dubai's Government, mandated Emirates NBD and other banks for a possible maiden debt sale. We expect this to be well-bid. More details will be communicated in due course once the roadshow concludes.
DM equities range-bound in spite of strong fundamentals
Developed market (DM) equities remain choppy and range-bound, although close to all-time highs in the US. Stock prices are supported by a good macroeconomic outlook and healthy corporate earnings trends, while valuations appear to be sustainable but not compelling at current levels.
The rout in expensive momentum stocks like internet and biotechnology names has swung interest towards deep-cyclical sectors – the ones particularly sensitive to economic growth. This rotation – while helping keep markets trading sideways – supports our favorable view on industrials and Eurozone oil stocks, the latter a contrarian play propped up by high dividend yields.
USD expected to strengthen along with US treasury yields
While economic trends remain pretty solid both in the US and Europe, central bank behavior has thus far been diverging. The Fed, although reducing asset purchases, persists with an ultra-dovish forward guidance which keeps short-term rates well-anchored and is a boost to the economy and equities in general. The ECB on the other hand, has kept benchmark rates on hold in the conviction the economic recovery would stave off deflationary trends.
The above divergences in monetary policy – along with continued purchases of treasuries by the Chinese Central Bank which keep a lid on US yields – have continued to sustain the upward moves in the value of the Euro and US treasuries beyond consensus expectations. But such trends should change as we approach year-end. Continued improvement in the US economy will push US market rates higher as investors demand a higher premium to hold debt, while ECB Governor Mario Draghi signaled just before the week-end that the ECB is comfortable easing monetary conditions by next June.
Eventually by the end of 2014 higher yields and a higher dollar – especially versus the euro, provided the ECB won't finds more reasons to delay some form of quantitative easing – should be expected.
Bullish trends on nickel
As for commodities we see a bullish bias to nickel trends; demand for nickel in the steel industry has of late surged driven by the demand for catering appliances, the automotive and transportation sectors. The medium-term target price for nickel is 20,000, which implies five per cent upside from current levels. Technically the outlook remains bullish, but resistance levels between 19,000 and 20,000 will prove to be strong.