Aditya Pugalia - Director, Financial Markets Research
Published Date: 15 April 2018
Global equities closed marginally higher as comments from the Chinese President Xi reduced risks of an extended trade war between the US and China. While anticipation of a military strike did weigh on investors sentiment, the possibility towards the end of the week that strikes would be limited helped equities. The scenario turned out to be true as US and its allies launched limited strikes after the market closed. Eventually, the MSCI World index added +1.8% on the back of strength in the MSCI G7 index (+1.8% 5d) and the MSCI EM index (+0.7%). Volatility dropped across the board with the VIX index, the V2X index and the CBOE EM ETF Volatility dropping -19.0% 5d, -12.3% 5d and -17.0% 5d respectively.
With Syria strikes turning out to be more limited than anticipated earlier, the focus of investors would shift to the earnings season. A relatively strong start to the earnings season should reaffirm investors’ confidence and provide strength to equities. Regional markets should also benefit as Syria overhang disappears for the moment.
With investors paying greater attention to Q1 2018 earnings season following a spike in geopolitical tensions and possibility of a rather hawkish Federal Reserve, it is worth noting that the global earnings revision turned negative for the first time since September 2017. This effectively implies that the cuts to earnings estimates outnumbered earnings upgrades last week. This is based on the Citigroup Global Earnings Revision index.
It was a mixed week of trading for MENA equities as geopolitical tensions over Syria weighed on investor sentiment. The losses were limited as earnings season got off to a relatively positive start and oil prices made sharp gains. The S&P Pan Arab Composite index dropped -0.7% 5d while Brent oil prices gained +8.2% 5d.
The Tadawul ended the week with losses of -1.6% as it bore the brunt of increased geopolitical tensions. Almarai added +2.5% 5d after the company reported Q1 2018 net profit of SAR 344mn, beating analysts’ estimates of SAR 312mn by 10%. United Electronics rallied +5.8% 5d after the company’s Q1 2018 net profit of SAR 21.6mn beat consensus estimates of SAR 16.7mn by 29.0%.
Over the weekend, Bloomberg reported that Saudi Aramco made USD 33.8bn in H1 2017. This dwarfs other global market heavyweights such as Apple and Samsung which made USD 26.9bn and USD 14.0bn respectively in H1 2017. The report from Bloomberg also states that the Saudi government has introduced a new sliding royalty scale that takes a bigger share of revenues as crude prices rise. It is imperative to note that oil prices averaged USD 53 per barrel in that period whereas they have averaged USD 67.5 per barrel so far this year. Saudi Aramco has declined to confirm the numbers put out by Bloomberg.
Elsewhere, Egyptian equities continued their positive run. The EGX 30 index added +0.7% 5d to take their year to date gains to +17.5%. Gains continued to be led by real estate sector stocks following reports that Medinet Nasr Housing and Sodic have entered into talks for a possible merger. The business model of both companies are complimentary to each other as Medinet Nasr holds 97 million of land while Sodic’s key strength is as a developer of projects. Medinet Nasr added +8.0% 5d while Sodic rallied +10.6% 5d.
It was a volatile week of trading for developed market equities as reduced risk of a full-blown trade war between the US and China was offset by possible confrontation between Russia and the US over Syria. Equities were helped by a non-committal Donald Trump as investors priced in a fairly small-scale military operation in Syria. The same was confirmed over the weekend after the markets closed. A relatively hawkish minutes from the last Federal Reserve meeting was lost amidst greater attention towards these issues. Eventually, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index closed in positive territory with gains of +2.0% 5d, +1.2% 5d and +1.0% 5d respectively.
The earnings season in the US got off to a robust start. With 6% of companies in the S&P 500 index having reported earnings, 70% of those companies reported a positive EPS surprise and 72% of those companies reported a positive sales surprise. According to FactSet, the aggregate earnings growth was 17.3%.
Emerging market equities underperformed wider equity markets with the MSCI EM index adding +0.7% 5d compared to a gain of +1.8% 5d in the MSCI World index. The underperformance can be put down to sharp decline in Russian equities. The MSCI Russia index dropped -11.6% 5d as investors weighed on the sanctions imposed by the US on individuals and large companies including Rusal.
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