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Aditya Pugalia - Director, Financial Markets Research
Published Date: 20 January 2019
Global equities closed higher as promise of tangible progress on various pending issues spurred investor optimism. These included a reported breakthrough in trade talks and moves from the US President on government shutdown. Additionally, there were signs that various emerging market economies are looking to use monetary stimulus to spur economic activity. Importantly, if the market activity of past week is any guide then it is fair to assume that Brexit developments no more remains a pivot point for global investors. Overall, the MSCI All Country index added +2.2% 5d with all major sub-indices closing in positive territory. The MSCI G7 index, the MSCI EM index and the MSCI FM index added +2.4% 5d, +1.7% 5d and +0.6% 5d respectively. Volatility eased further with VIX index, the V2X index and the CBOE EM ETF Volatility index dropping -2.1% 5d, -18.0% 5d and -8.5% 5d respectively.
The focus of investors’ will remain on corporate earnings. They will also be watching out for any further progress on issues of trade and the US government shutdown which are currently weighing on investor sentiment. The UK government's Plan B on Brexit will also be watched even though not much is expected to change in terms of broad picture on Brexit. Regionally, corporate earnings along with dividend announcements will be under focus.
The ongoing saga over Brexit has put the focus on its impact on UK equities as there is little clarity on what shape the negotiations will take. One comforting factor for UK equities so far has been low valuations. In fact, the difference between the FTSE All Share dividend yield and yield on 10y Gilts is at its highest on record at 3.3%. The same gives optimism of a re-rating of UK stocks should some clarity emerge on Brexit and a no-deal scenario is avoided.
It was a mixed week of trading for regional equities as the earnings season began in the right earnest and oil prices continued to show sustained strength. The MSCI Arabian Markets index added +1.4% 5d.
The recent trend of divergence between real estate and banking sector stocks continued. It is worth noting that both these sectors together account for significant weightage on regional indices. The S&P UAE Real Estate index dropped -3.3% w-o-w while the S&P UAE Banks index added +1.2% w-o-w. In Saudi Arabia, the S&P Saudi Arabia Real Estate index closed flat w-o-w while the S&P Saudi Arabia Banks index gained +4.6% w-o-w. The outperformance appears to be accentuated by strong corporate earnings exceeding analyst expectations so far. It is also worth highlighting that the GCC Banks are currently trading at 1.7x 12 month forward price to book with a dividend yield of 4.5% compared to the MSCI EM Banks index which is trading at 1.06x 12 month forward price to book with a dividend yield of 4.36%.
The Tadawul continues to outperform regional peers with 5d gain of +2.9%. Foreign investors continue to buy into stocks ahead of inclusion into the MSCI EM index and the FTSE Russell EM index later in the year. The strength in oil prices also seem to be helping sentiment as reflected in +1.6% 5d gain in the Tadawul Materials index.
Developed market equities closed higher across the board amid reports of a breakthrough in trade talks between the US and China and a fresh proposal from US President Donald Trump to end the impasse over the government shutdown. Investor sentiment also received a boost from better than expected economic data which indicated that the current growth trajectory has more room than anticipated. On the Brexit front, developments dominated headlines but made little impact on market movements as investors’ appear to have already priced in a delay in actual Brexit date. Overall, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index added +2.9% 5d, +2.3% 5d and +2.5% 5d respectively.
The earnings season in the US exhibited strength in some pockets but overall remained below expectations. With 11% of companies in the S&P 500 index having reported earnings, 76% of companies have reported a positive EPS surprise and 56% have reported a positive revenue surprise. However, according to FactSet, the blended earnings growth is 10.6% compared to estimates of 12.3% at the end of 2018.
Emerging market equities continued their positive run. The MSCI EM index (+1.7% 5d) closed in positive territory for a fourth consecutive week to close at its highest level since Q4 2018.
Turkey’s Istanbul 100 index was a notable outperformer with gains of +7.4% as talks between the US and Turkish Presidents eased concern over any fallout following the pullout of US troops from Syria. Additionally, the Turkish Central Bank left interest rates unchanged and reaffirmed its stance on inflation.
Global equities closed marginally lower
GCC Equity Flow Monitor
Global equities closed higher last week
Global equities closed higher