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Aditya Pugalia - Director, Financial Markets Research
Published Date: 26 May 2019
Global equities closed lower as there were few signs of any progress between the US and China on the trade front. In fact, the negotiations appeared to have broken down following a decision by the US government to ban Huawei equipment. Weak economic data and sharp decline in commodities also weighed on investor sentiment. Overall, the MSCI All Country index dropped -1.0% 5d with most sub-indices closing lower. The MSCI G7 index and the MSCI EM index and the MSCI FM index lost -1.2% 5d, -1.0% 5d respectively. Notwithstanding the sell-off, volatility remained low except in Europe. The V2X index rose +11.6% 5d while the VIX index closed flat and the CBOE EM ETF Volatility index dropped -4.9% 5d.
With limited top-tier economic data scheduled for release this week, the focus of investor’s will remain on progress in discussions on geopolitical tensions. Further, investors in the region will be keen to see how markets behave especially in Saudi Arabia post its inclusion in the MSCI EM index.
The recent sell-off in Japanese equities has pushed the Topix’s dividend yield to more than 2.5%. The move has resulted in the dividend yield spread between Japanese and US equities at its widest since 2012. This is seen by some market participants as sign that the market is oversold. The Topix index year to date gains stand at +3.2% compared to +12.7% ytd for the S&P 500 index.
Source: Bloomberg, Emirates NBD Research
Regional markets continued to hold their own amid weak global backdrop. Most markets benefitted from flows ahead of formal inclusion and weight changes in broader indices. The S&P Pan Arab Composite index ended the week with gains of +0.1% 5d. Having said that, weakness in oil prices and rise in geopolitical tensions did weigh on investor sentiment. WTI and Brent futures ended the week with losses of -6.6% 5d and -4.9% 5d respectively.
The trading week in the UAE was dominated by Emaar-related names as they sustained their gains for a second consecutive week. Emaar Properties, Emaar Development and Emaar Malls added +3.8% 5d, +4.1% 5d and +2.8% 5d respectively. Elsewhere, First Abu Dhabi Bank gained +1.5% 5d to close higher for the first time in four weeks. At the end of last week, FTSE Russell informed, unlike the MSCI, has decided to increase the weight of First Abu Dhabi Bank in their EM index. According to market estimates, it should result in inflows of USD 225mn in the stock.
The Tadawul closed lower for a third consecutive week with losses of -1.1% 5d. Notwithstanding inflows for foreign investors, there is speculation that domestic institutional investors are trimming their positions. The weakness was broad based with market heavyweights underperforming the broader index. Sabic dropped -3.2% 5d, Al Rajhi Bank declined -1.6% 5d and Maaden lost -5.7% 5d.
It is worth highlighting that ahead of the MSCI event later this week, the Tadawul is trading at 12m forward earnings of 15.9x. This implies a sharp premium relative to the MSCI Emerging Markets index which is trading at 12m forward earnings of 10.7x.
Developed market equities closed lower as investor’s started repricing the odds of a trade deal between the US and China. Weak economic data from the US led credence to view that economic growth is slowing and lack of a deal could cripple the global economy further. Further, the decision of the UK Prime Minister Theresa May to quit in the first week of June had limited impact on both domestic as well as global equities. It is likely that investors are biding their time till they know who is replacing her.
Overall, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index ended the week -1.2% 5d, -1.5% 5d and -0.6% 5d respectively.
Emerging market equities performed broadly in line with the wider market. The MSCI EM index dropped -1.0% 5d to close in negative territory for a third consecutive week. Chinese equities closed lower for a fifth consecutive week with the Shanghai Composite index losing -1.0% 5d.
Indian equities were a notable exception as the incumbent Prime Minister Narendra Modi’s political party returned to power with a bigger mandate then received by it in 2014. The election results has removed the political overhang and raised hopes that the new government will execute pending economic reforms at a much faster pace compared to its first term. The Nifty index gained +3.8% 5d.
Global equities closed higher
GCC Equity Flow Monitor