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Published Date: 03 May 2020
Global equities closed marginally higher as central banks reaffirmed their commitment to providing as much support as needed and as more countries fleshed out plans to ease lockdown measures. However, economic data and corporate earnings continued to reflect the grim reality of the global economy at the moment. A sharp recovery in oil prices also provided some support to risk assets.
Overall, the MSCI All Country World index added +1.3% 5d on the back of strength across its sub-indices. The MSCI EM index was a notable outperformer with gains of +4.3% 5d. Volatility eased off across most markets but rose marginally in the US. The VIX index added +3.5% 5d.
Beyond coronavirus, the focus this week again will be on central banks with scheduled meetings of the Bank of England and the Reserve Bank of Australia. We do not expect significant announcements from either as measures previously announced remain a work in progress. Investors will also keenly watch the non-farm payroll data which is likely to confirm the extent of damage to employment as shown by initial jobless claims figures.
Global equities, over the past month, have remained in a league of their own. The price movement indicates that equity investors retained their focus on central bank support and easing measures announced by various governments. The fact that economic data was largely shrugged off is reflected in the fact that the MSCI World index gained +12.8% 1m at a time when the Citigroup global economic surprise index plummeted to the lowest level since the great financial crisis.
Source: Emirates NBD Research
Regional markets closed higher amid a rebound in oil prices and easing of some lockdown measures across gulf economies. Overall, the S&P Pan Arab Composite index added +3.7% 5d.
UAE bourses closed higher with the DFM index and the ADX index adding +7.2% 5d and +4.1% 5d respectively. Gains were rather broad based with all sectors participating in the rally. The trend was similar on the Tadawul and the KWSE PM index which ended the week with gains of +7.7% and +6.6% respectively.
The earnings season across major regional stock markets has so far been weak. On an aggregate basis, earnings and revenues for companies listed on the Tadawul so far have dropped -2.7% and -6.6%. Similarly for companies listed on the Qatar Exchange and the MSM30 index earnings so far have dropped -64.4% and -28.3% respectively.
It was a week of two halves for most developed market equities as optimism over the declining pace of viral outbreak was met with continued weak economic data and poor corporate earnings. The Federal Reserve and the European Central Bank were forthright and somber in their assessment of the road ahead. The Fed Chairman Jerome Powell said that the ongoing public health crisis ‘poses considerable risk to the economic outlook over the medium term’. Both central banks reiterated to use all policy tools available to them even as they acknowledged that it may not be enough. They urged governments to undertake more fiscal measures to support the economy.
Overall, the S&P 500 index lost -0.2% w-o-w while the Nikkei index and the Euro Stoxx 600 index added +1.9% w-o-w and +2.4% w-o-w respectively. Irrespective of broad index moves, there is growing evidence of the pain felt by large market heavyweights. For example, Royal Dutch Shell, last week, lowered its dividend for the first time since the Second World War from USd 47 to USd 16 per share.
The earnings season in the US continues to remain rather dismal. With nearly 55% of companies in the S&P 500 index having reported earnings, 65% of companies are reporting profits and 60% of companies are reporting sales above estimates. According to FactSet, the blended earnings growth at the end of last week came in at -13.7%. If this rate of decline holds, then this will be the largest y/y decline in earnings since Q3 2009. The S&P 500 index is currently trading at 20.3x 12m forward earnings, higher than the 5y and 10y averages.
Emerging market equities outperformed the broader market. The MSCI EM index added +4.3% 5d relative to a gain of +0.9% 5d in the MSCI World index. The weakness in the USD and some strength in oil prices contributed to this outperformance.
According to Bloomberg, foreign investors pulled out USD 37bn from emerging market equities in April despite a rebound in prices. The outflow last month take the cumulative withdrawal over the past three months to USD 127bn.
GCC Equity Flow Monitor - May 2020