Aditya Pugalia - Director, Financial Markets Research
Published Date: 13 May 2018
Global equities closed higher amid boost from high energy prices and continued strength in corporate earnings. The MSCI World index added +2.0% 5d on the back of strength in the MSCI EM index (+2.5% 5d) and the MSCI G7 index (+2.1% 5d). Regional equities underperformed with the MSCI Arabian Markets index losing -2.1% 5d. Volatility declined across the board with the VIX index (US), the V2X index (Europe) and the CBOE EM ETF volatility index dropping -14.4% 5d, -7.3% 5d and -8.6% 5d respectively.
With earnings season nearing an end, the focus of investors will shift towards central banks and the evolving geo-political scenarios. Regionally, volumes are expected to remain towards the lower end of the range as the Holy month of Ramadan starts later this week.
Chart of the week
Ahead of elections, Turkish stocks have come under sustained pressure as doubts grow over the economy. A high oil price is also a drag on Turkish economy. The sharp underperformance of Turkish stocks compared to emerging market peers has left Turkish stocks at their cheapest level relative to broad emerging market equities. The Istanbul 100 index has declined -7.1% 1m compared to a drop of -0.5% 1m in the MSCI EM index. The gap between price-to-earnings ratios of the Istanbul 100 index and the MSCI EM index widened to its highest level since 2005.
Most MENA equity indices closed lower as corporate earnings continued to remain weak and geopolitical tensions rose. While the decision of the US to withdraw from the Iran deal had a positive impact on oil prices, the political impact of the same weighed on investor sentiment. The recent market movement also provides evidence that the impact of strength in oil prices is not filtering into regional financial markets. The S&P Pan Arab Composite index dropped -1.7% 5d.
The Tadawul closed lower for a third consecutive week with losses of -2.4% 5d. Savola dropped -4.3% 5d after the company reported Q1 2018 net loss of SAR 84.3mn, missing consensus estimates of a profit of SAR 59.6mn. The company attributed the decline to lower margins and higher operating cost. Zain Saudi dropped -13.2% after the company reported Q1 2018 net loss of SAR 77mn, higher than consensus estimates of SAR 34mn.
UAE bourses continued to remain weak with the DFM index and the ADX index dropping -2.3% 5d and -2.6% 5d respectively. The trend was similar to the previous week with real estate sector stocks leading the decline. Emaar Properties dropped -7.6% to close below AED 5.0 for the first time since February 2016. Aldar Properties lost -1.9% 5d as the company informed that it is buying real estate assets worth AED 3.7bn from Tourism Development & Investment Company. The asset portfolio is a combination of recurring income assets and development assets.
Developed market equities closed higher amid continued strength in earnings and gains in energy-related stocks. A rather subdued inflation data from the US and lack of surprise from the Bank of England provided further impetus to equities. The S&P 500 index, the Euro Stoxx 600 index and the Nikkei index added +2.4% 5d, +1.4% 5d and +1.3% 5d respectively. UK stocks outperformed European equities with the FTSE 100 index adding +3.0% 5d. The S&P 500 energy sector index added +3.8% 5d.
The earnings season in the US remains on a strong footing. With 91% 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 24.9%. 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 outperformed wider equity markets with the MSCI EM index adding +2.5% 5d compared to a gain of +2.0% 5d in the MSCI World index. Within emerging markets, the BRIC bloc outperformed with the MSCI BRIC index adding +3.2% 5d. The gain in emerging market equities coincided with reduced pressure on emerging market currencies after below expectation inflation reading in the US.
GCC Equity Flow Monitor - June 2018
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