Global equities closed lower

Global equities closed lower amidst a variety of factors weighing on investor sentiment. These include growing concerns over the depth of slowdown in the global economy and the accompanying response of global central bankers. Continued concerns over geopolitical conditions remain an overhang. The MSCI All Country index dropped -0.7% 5d. The sub-indices showed a mixed picture with the MSCI G7 index and the MSCI Frontier market index losing -1.0% 5d and -0.3% 5d while the MSCI EM index added +0.6% 5d. Volatility increased across the board with the VIX index, the V2X index and the CBOE EM ETF Volatility index jumping +16.6% 5d, +10.6% 5d and +2.5% 5d respectively.  

The focus of investors this week will remain on the European Central Bank as they look for indications whether they will move lock-step with the US Federal Reserve or possibly wait slightly longer. Further economic data from the US and announcement of the new UK Prime Minister will also be keenly watched.

Chart of the week

At a time when earnings are signaling a slowdown, the focus will inevitably shift to valuations. It is interesting to note that price to book premium of Asian equities over US equities has reached its highest level since 2002. The ongoing trade war between the US and China can be a probable reason behind the underperformance of Asian equities. The MSCI Asia Pacific index has rallied +9.7% ytd compared to gains of +18.7% ytd in the S&P 500 index.

Asian equities cheaper relative to US equities

Source: Bloomberg, Emirates NBD Research

MENA Markets

Last week, regional markets closed mixed as flows were dominated by corporate earnings releases. The concerns over geopolitical developments and sharp move lower in oil prices were largely shrugged off. The S&P Pan Arab Composite index added +0.4% 5d.

UAE bourses led gains in the region with the DFM index and the ADX index adding +2.2% 5d and +3.2% 5d respectively. Gains were led by banking sector stocks as most major banks reported better than expected earnings. First Abu Dhabi Bank reported Q2 2019 net income of AED 3.22bn (+5.2% y/y), beating Bloomberg consensus estimates of AED 3.13bn. Similarly, Dubai Islamic Bank reported Q2 2019 net income of AED 1.38bn (+14% y/y), ahead of Bloomberg consensus estimates of AED 1.26bn. First Abu Dhabi Bank and Dubai Islamic Bank ended the week with gains of +4.0% 5d and +1.2% 5d respectively.

Along with earnings, First Abu Dhabi Bank said it would like to propose to open the stock to 100% foreign ownership. The proposal would need general rules around foreign ownership to change. At the moment, a 49% foreign ownership limit is applied for on-shore companies and central bank regulation caps UAE bank’s foreign ownership limit at 40%.

The Tadawul added +0.7% 5d as corporate earnings remained mixed. Zain Saudi added +7.2% 5d after the company reported Q2 2019 net profit of SAR 130mn compared to a loss of SAR 38mn last year. The company benefitted from decrease in CITC royalty fees from 15%. However, Jarir (-1.4% 5d) and Yansab (flat 5d) reported earnings that missed consensus estimates.

Developed Markets

Developed market equities closed largely lower as multitude of factors weighed on investor sentiment. These included mixed economic data from the US, heightened political tensions and continued speculation over the size of interest rate cut by the US Federal Reserve. It does appear that investors are increasingly banking on central banks with expectations increasing of a possible 50 bps rate cut in the US and the restart of quantitative easing in the Eurozone. Overall, the S&P 500 index and the Nikkei index dropped -1.2% 5d and -0.8% 5d respectively while the Euro Stoxx 600 index ended the week flat.

The second quarter earnings in the US has gotten off to a rather sedate start. With 79 companies in the S&P 500 index having reported earnings, the I/B/E/S data indicates the aggregate earnings growth to 1.0% y/y and revenues to increase 3.4% y/y. Nearly 77% of companies who have reported have beaten consensus profit estimates and 65% of companies have been consensus revenue estimates.

Emerging Markets

Emerging market equities outperformed the broader market. The MSCI EM index added +0.6% 5d compared to the MSCI World index which dropped -0.8% 5d. Emerging markets asset gained on expectations of easy monetary policy in developed markets. They were also helped by central banks across EM countries front-running developed market central banks. For example, central banks in South Korea and Indonesia cut rates by 25 bps each and South Africa’s central bank reduced it to 6.5%.

Turkey’s Istanbul index added +2.5% 5d as the new central bank governor hinted at a move towards easy monetary policy. According to Bloomberg, Turkey has the highest borrowing costs in the world once adjusted for inflation.

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