Aditya Pugalia - Analyst
Published Date: 12 March 2017
Global equity markets closed marginally lower as weakness in commodity prices and caution ahead of the Federal Reserve meeting outweighed continued robustness in economic data. Concerns over valuations also remain an overhang on broad markets.
The MSCI World index dropped -0.2% 5d on the back broad based weakness. The MSCI G7 index, the MSCI EM index and the MSCI Arabian Markets index dropped -0.3%, -0.5% and -1.2% respectively. Volatility spiked in developed markets with the VIX index (US) and the V2X index (Europe) adding +6.4% 5d and +0.5% 5d respectively.
The focus this week is likely to remain on the Federal Reserve meeting later this week. While a rate hike is 100% priced in, the accompanying comments will be closely watched to decipher the pace of rate hikes in the remaining nine months of 2017. Regionally, markets are likely to suffer from lack of catalysts even as decline in oil prices further dampens investor sentiment.
It was yet another dull week of trading for regional equities. The decline in oil prices in the latter half of the week further affected investor interest. The Bloomberg GCC 200 index dropped -1.2% while the ICE Brent futures declined -8.1% 5d.
UAE bourses closed lower with the DFM index and the ADX index losing -1.8% 5d and -3.0% 5d respectively. However, the headline index moves are slightly misleading as they do not adjust for dividends. The move in the ADX index can be attributed to stock which went ex-dividend last week including National Bank of Abu Dhabi and First Gulf Bank. Emaar Properties declined -3.7% after the company recommended a cash dividend of AED 0.15 per share, unchanged from last year. The stock now offer a dividend yield of 2.04% at last week’s closing price. Aramex (+14.6% 5d) was among the best performing stock with locals stepping in to buy following opening up of some headroom in the foreign ownership limit. Foreign investors (ex-GCC) hold 46.7% of shares against permitted 49% in the company.
The trend of stocks getting hit on going ex-dividend was also visible on the Qatar Exchange (-2.7% wow). Barwa Real Estate dropped -12.1% while Doha Bank lost -15.9%. It appears that investors are paring their positions in the stocks post the dividend record date as only half of those moves can be accounted by dividends.
The Tadawul declined for a third consecutive week as it continues to suffer from low volumes. Saudi Electricity dropped -1.6% 5d even after the company was exempted from paying SAR 6.1bn in consumption fees. The royal decree cancelled the 2% power consumption fee and exempted outstanding fees. Banque Saudi Fransi closed the week with gains of +0.7% amid reports that its largest shareholder Credit Agricole is considering to sell its 31% stake in the bank.
Elsewhere, the EGX 30 index rallied +4.4% 5d following clarity on stamp duty and move in the EGP from 15.80 level to 17.88 level. Gains were led by EFG Hermes (+7.7% 5d) and Ezz Steel (+13.2%).
Developed market equities closed mixed even as economic data continues to remain robust and a possible 25 bps hike in interest rates in the US seemingly priced in. The sharp decline in oil prices and concerns that markets are perhaps priced for perfection does remain an overhang on broad equity markets. The S&P 500 index and the Euro Stoxx 600 index dropped -0.4% 5d and -0.5% 5d respectively while the Nikkei index gained +0.7%.
The S&P 500 index is currently trading at 18.5x 2017E earnings, a 29.4% premium to the 10-year average of 14.3x. Similarly, the Euro Stoxx 600 index is trading at a 24.4% premium to the 10-year average of 12.3x.
For a second consecutive week, emerging market equities underperformed global equity markets with the MSCI emerging markets index losing -0.5% 5d compared to +0.2% 5d drop in the MSCI World index. The underperformance can be attributed to investors hedging their bets ahead of the Fed’s meeting later this week.
India’s Nifty index (+0.4% 5d) marginally outperformed the wider index as continued improvement in economic data and expectations of victory of the ruling party in the crucial state elections boosted investor sentiment. The results over the weekend confirmed the victory and given the margin, it will not be surprising to see Indian equities receive a further boost next week.
US non-farm payrolls beat expectations