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Aditya Pugalia - Director, Financial Markets Research
Published Date: 22 September 2019
Global equities closed marginally lower as investors remain cautious in light of little movement in multiple overhangs. These include elevated geopolitical tensions and mixed signals from the trade front. A more measured tone on further easing from the Federal Reserve also added to the caution. The MSCI All Country index dropped -0.4% 5d on the back of weakness across major sub-indices. The MSCI G7 index, the MSCI EM index and the MSCI FM index dropped -0.3% 5d, -0.5% 5d and -1.4% 5d respectively.
The focus of investors this week will return to Brexit amid an early-week ruling from the UK Supreme Court over suspension of the Parliament. Further, investors will pay attention to various central bank speakers from the Eurozone and US and also keep an eye on how geopolitics evolves.
In a week which was dominated by central bank meetings, it is worth noting that the equity-bond correlation is close to its lowest level in the last five years. This is in contrast to prolonged periods of positive correlation in the last couple of years. The 30-day correlation between the Bloomberg Barclays Global Aggregate Total Return index and the MSCI World Total return index at the end of last week stood at -0.6%.
Source: Bloomberg, Emirates NBD Research
Regional equities traded mixed amid fallout from attacks on Saudi oil facilities. However, market moves remained mild as investors remained in wait and watch mode. Investor sentiment was also helped by assurances from Saudi Arabia that the impact was contained and operations will be normalized as soon as end-September 2019. Overall, the S&P Pan Arab Composite index added +0.8% 5d.
UAE bourses closed mixed with the DFM index losing -1.8% 5d and the ADX index adding +1.0% 5d. The flow remained concentrated around stocks which have rallied substantially so far in 2019 as investors looked to lock in some gains. Emaar Properties and Aldar Properties dropped -3.0% 5d and -2.7% 5d to trim their ytd gains to 16.2% and 36.2% respectively. Despite last week’s losses, both these stocks continue to outperform the broader indices.
The Tadawul rallied +1.2% 5d on the back of inflows owing to the fourth phase of inclusion in the FTSE EM index. According to the schedule put out by FTSE, the closing prices of 19 September 2019 are to be used for inclusion which will be effective 23 September 2019. According to market estimates, this is likely to result in an inflow of as much as USD 1.4bn into Saudi equities. It was no surprise to see the total value traded jump to as high as SAR 8bn on 19 September 2019. The next and final phase of inclusion will happen in March 2020.
Developed market equities closed mixed as investors factored in the central bank meetings (Fed and the BoE) and mixed signals on the trade front. The Federal Reserve cut rates by 25 bps while the Bank of England left interest rates unchanged. Both central banks, however, insisted in varied tones that they remain ready to act should the economic growth slow down further or Brexit unravels. The earlier than scheduled departure of the Chinese trade delegation from the US laid bare the continued uncertainties around talks between the US and China. US President Donald Trump further raised the stakes by saying that he only seeks a complete deal with China. The sharp escalation in geopolitical tensions had limited impact on developed market equities.
Overall, the S&P 500 index and the Euro Stoxx 600 index closed -0.5% 5d and +0.3% 5d respectively.
Emerging market equities underperformed the broader market as the tone of the Federal Reserve was considered to be more measured despite the rate cut. Having said that, there were pockets of outperformance within the EM universe as economies like India and Indonesia embarked on a fiscal stimulus program.
India’s Nifty index rallied +5.3% on Friday after the government announced a USD 20bn fiscal stimulus in the form of a drastic reduction in corporate taxes. The announcement can be seen as a structural reform as it reduces tax rates by as much as 10% in most cases and provides an additional incentive for new manufacturing companies. The reduction in tax rates brings India at par with its Asian peers. More importantly, it provides the clearest signal that the government is willing to do ‘whatever it takes’ to arrest the current economic slowdown. Having said that, the step will come at the cost of fiscal prudence and will have more impact over the medium term than in the short term.
GCC Equity Flow Monitor
Global equities closed higher