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Aditya Pugalia - Director, Financial Markets Research
Published Date: 28 July 2019
Global equities closed higher as investors latched onto globally synchronized easy monetary policy prospects without worrying about the weak global growth implications. A status quo in geopolitical tensions and stable earnings helped investor sentiment. The MSCI All Country index gained +0.8% 5d on the back of strength in MSCI G7 index which added +1.2% 5d. Other major sub-indices including the MSCI EM index and the MSCI FM index dropped -0.8% 5d and -0.1% 5d respectively. Surprisingly, volatility continues to remain subdued. The VIX index and the V2X index dropped -15.9% 5d and -7.5% 5d respectively.
The focus of investors this week will be on central banks with the Federal Reserve and Bank of England meeting. While a 25 bps rate cut by the Fed is priced in, the interest will be on the guidance about the path forward. For BoE, investors will be watching the tilt of policy given increased chances of a no-deal Brexit.
Chart of the week
It is interesting to note that cyclical stocks continue to outperform defensive stocks even as concerns over economic growth continues to mount. The spread between the MSCI US Cyclical and Defensive stock is within 0.2% of the record highs seen in April 2018.
Source: Bloomberg, Emirates NBD Research
Regional equities traded mixed on the back of underwhelming earnings releases. The lack of adverse developments in geopolitical tensions and positive corporate announcements helped investor sentiment. The S&P Pan Arab Composite index dropped -0.2% 5d.
UAE bourses led gains in the region with the DFM index and ADX index adding +4.3% 5d and +2.9% 5d respectively. The DFM was propped up by strength in Emaar-related names. Emaar Properties, Emaar Development and Emaar Malls gained +7.0% 5d, +5.7% 5d and +7.1% 5d respectively. The immediate catalyst appears to be an agreement between Emaar Properties and Beijing Daxing International Airport to develop a residential complex in a project estimated at USD 11bn. The project is expected to be completed over a period of 10 years. Aldar Properties (+10.8% 5d) was another notable gainer after the company raised its guidance for its third-party development management business gross profit by 50%.
The week was also dominated by earnings from major telecom companies in the region. Etisalat (+2.7% 5d), du (+2.0% 5d) and Saudi Telecom Company (-2.0% 5d) all reported earnings that topped estimates. For H1 2019, Etisalat announced a dividend of AED 0.40 per share, Saudi Telecom Co. a dividend of SAR 1 per share and du a dividend of AED 0.13 per share.
The Tadawul dropped -2.4% 5d as investors locked in gains of the recent past. This was the first weekly decline in four weeks. The broader market was dragged lower by market heavyweight sectors with the Tadawul Banks index dropping -2.7% 5d and the Tadawul Materials index losing -2.0% 5d.
Developed market equities closed higher on the back of expectations of a ‘central bank put’. While the Federal Reserve is widely expected to cut interest rates later this week, the European Central Bank made its worries about growth amply clear. Following last week’s meeting, the ECB said that the interest rates will remain at present or lower levels at least until H1 2020. The weaker than expected US GDP data drove home the fact that economic data is turning increasingly weak and further strengthened the case for globally synchronized easy monetary policy. Overall, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index added +1.7% 5d, +0.9% 5d and +0.9% 5d respectively.
The formal election of Boris Johnson as the UK’s Prime Minister had limited impact on UK stocks even as he remained firm on his promise to deliver Brexit by 31 October 2019 with or without a deal. The FTSE 100 index added +0.5% 5d.
The second quarter earnings in the US have remained largely within expectations. With 44% companies in the S&P 500 index having reported earnings, the FactSet data indicates the aggregate earnings growth to be -2.6% y/y. This is relative to expectations of -2.7% y/y at the start of the quarter. Nearly 77% of companies who have reported have beaten consensus profit estimates and 61% of companies have beaten consensus revenue estimates.
Emerging market equities underperformed global equities as growth concerns offset the easy monetary policy moves. The IMF has lowered growth rates for most emerging markets. The MSCI EM index dropped -0.8% 5d relative to the MSCI World index which gained +1.0% 5d. Turkey became the latest emerging market country to cut interest rates as the central bank reduced rates by 425 bps to 19.75%. It was the first rate cut since 2016 and the largest single move since 2002. The Borsa Istanbul 100 index added +1.0% 5d.
GCC Equity Flow Monitor - June 2019
Global equities closed marginally higher
Global equities closed lower
Daily Outlook: Mixed messages from US data