Aditya Pugalia - Director, Financial Markets Research
Published Date: 06 May 2018
While global equities broadly closed lower, the trend within regions is turning increasingly mixed. This can be partly explained by resurgence of domestic factors i.e. politics in the US and growing speculation over Brexit. The MSCI World index dropped -0.3% 5d with all its sub-indices closing lower. However, within developed markets European equities ended the week in positive territory while US equities closed lower. Volatility declined marginally in the US with the VIX index losing -4.2% 5d but increased in Europe and emerging markets. The V2X index and the CBOE EM ETF Volatility index gained +2.2% 5d and +4.4% respectively.
The focus this week will be on the Bank of England meeting where the odds of a rate hike have shifted significantly over the last two weeks. The market is now pricing in no change compared to a near certain hike two weeks ago. Elsewhere, the focus will remain on economic data as there is growing speculation over the possibility of economic growth peaking sooner than expected.
Chart of the week
Over the last three months, European equities have outperformed US equities. The Euro Stoxx 600 index has rallied +2.8% 3m compared to a drop of -0.7% in the S&P 500 index. In this context, it is interesting to note that the price differential between US and European technology stocks are currently at their lowest since June 2017. This is based on the price to earnings ratio of the S&P 500 Information Technology Index and the Stoxx Europe 600 Technology index. Technology sector stocks have been the biggest driver of return on both the indices over the last one year.
Most MENA equity indices closed lower amid mixed corporate earnings and weak investor sentiment. The S&P Pan Arab Composite index dropped -1.8% 5d.
UAE bourses closed lower with the DFM index and the ADX index losing -3.3% 5d and -2.4% 5d respectively. The DFM index closed below the psychological level of 3,000 for the first time since February 2016. Much of the recent decline on the DFM index can be attributed to growing concern over the real estate sector. Emaar Properties, the bell weather stock, has closed lower for nine out of the last 10 weeks of trading. The stock declined -0.7% 5d last week even as the company reported better than expected earnings. Revenues for the company increased to AED 5.59bn, beating consensus estimates of AED 5.46bn by 2.4%. Net profit for the company increased +8% y/y to AED 1.5bn. Damac, the other real estate developer listed on the DFM, lost -8.9% 5d.
The Tadawul lost -1.7% 5d as foreign investors were net sellers for the week. Weak corporate earnings weighed on investor sentiment. Al Rajhi Bank lost -1.6% 5d after the bank reported Q1 2018 net profit of SAR 2.38bn, missing consensus estimates of SAR 2.46bn by 3.2%.
Elsewhere, the Qatar Exchange dropped -3.1% 5d as investors took some money off the table ahead of the MSCI decision on 15 May 2018. Most market heavyweights closed lower with Qatar National Bank losing -1.5% 5d and Qatar Electricity & Water Co dropping -3.1% 5d.
Developed market equities closed mixed as European equities continued to receive a boost from weak EUR while US equities continue to face the overhang of domestic politics. US equities did receive a boost late in the week from a fairly robust non-farm payrolls data which showed that unemployment rate has dropped below 4%. The statement after the Federal Reserve meeting earlier in the week had a dovish tilt compared to expectations as members described the symmetric nature of the inflation target. However, it had no impact on equity markets. Eventually, the Euro Stoxx 600 index and the Nikkei index added +0.6% 5d and +0.9% 5d respectively while the S&P 500 index lost -0.2% 5d.
The earnings season in the US remains on a strong footing. With 81% of companies in the S&P 500 index having reported earnings, 78% of those companies reported a positive EPS surprise and 77% of those companies reported a positive sales surprise. According to FactSet, the aggregate earnings growth is 24.2%. If this is maintained then it would be the highest earnings growth since Q3 2010. It should also be noted that at the end of Q1 2018, the estimated earnings growth was 17.1%.
Emerging market equities underperformed wider equity markets with the MSCI EM index losing -1.7% 5d compared to a drop of -0.3% 5d in the MSCI World index. Within the emerging markets, the BRIC bloc outperformed with the MSCI BRIC index dropping -1.3% 5d. It is evident that sustained strength in the USD is having a negative impact on appetite for riskier EM assets.
A weaker EM currency USD undermines investor return in the USD. For example, India’s Sensex has risen +2.5% ytd in local currency terms but has dropped -2.0% ytd in USD terms. Hence, it is no surprise to see weakness in EM currencies reflecting onto EM equities. The JP Morgan Emerging Market Currency Index has dropped for a fifth consecutive week and the MSCI EM equities have dropped for four out of those five corresponding weeks.
GCC Equity Flow Monitor - June 2018
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