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Published Date: 01 March 2020
Global equities had one of their worst weeks since the 2008 financial crisis as investors reacted to the escalating pace of the coronavirus outbreak outside of China. The breadth of its spread laid bare the worries over its impact on global economic growth as equities finally caught up with moves in other asset classes. The MSCI All Country index dropped -10.5% 5d on the back of weakness across its sub-indices. A much sharper move was seen across volatility indices with the VIX index, the V2X index and the CBOE EM ETF Volatility index jumping +135% 5d, +168% 5d and +120% 5d respectively.
The primary focus of investors’ will be on the virus’s pace of expansion. Additionally, investors will be paying attention to first-tier economic data to gauge the severity of impact and will also be watching out for a response from various policymakers. Regionally, we expect markets to follow global cues.
Global equities lost USD 6tn in market capitalization over the last week. The Bloomberg World Stocks Market Capitalization index ended last week at below USD 80tn, a level last seen in October 2019.
Regional bourses closed lower as weak global backdrop and the sharp increase in coronavirus cases reported from the region weighed on investor sentiment. The sustained decline in oil prices also contributed to the weakness. All major indices closed in negative territory with the S&P Pan Arab Composite index ending the week -3.9% 5d.
The weakness across markets was broad based with market heavyweights bearing the brunt. Most of these stocks had their biggest weekly declines since 2017. Emaar Properties (-10.0% 5d), Abu Dhabi Commercial Bank (-6.0% 5d), Al Rajhi Bank (-5.5% 5d) and Qatar National Bank (-3.4% 5d) were among major losers. Oil-related stocks also drifted lower with Saudi Aramco, Sabic and Industries Qatar dropping -0.9% 5d, -6.3% 5d and -0.1% 5d respectively.
Following the sharp decline in equities over the last week, the dividend yield on GCC equities has shot to record levels. According to Bloomberg, the 12m forward dividend yield on the MSCI GCC Countries index at the end of last week stood at 5.0%. This is in contrast to a 3.2% 12m forward dividend yield on the MSCI Emerging Markets index and a 2.9% 12m forward dividend yield on the MSCI G7 index.
Developed market equities had their worst week since the 2008 financial crisis. The immediate trigger was the increasing pace of coronavirus outbreak outside of China which in turn prompted countries to take hard measures such as restrictions on travel, quarantining a large number of people and cancellation of major events. Such measures are expected to have a significant impact on economic growth which at the moment appears hard to quantify. Overall, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index dropped -11.5% 5d, -12.3% 5d and -10.0% 5d respectively.
One indicator which reflected the current state of the market was CNN’s Fear and Greed index which ended the week deeper into the extreme fear quartile with a reading of 10. One month ago the index was in neutral territory with a reading of 52.
Emerging market equities outperformed broader indices with the MSCI EM index dropping -7.3% 5d compared to a decline of -10.5% 5d in the MSCI World index. However, that could be more of a case of broader equities catching up with the drop in emerging market equities which had been leading the decline in risk assets so far.
Some of the technical factors helping emerging markets could be already showing signs of waning. For example, the Chinese equity markets are now at its most leveraged since 2016 and the value of shares sold short has also surged to a record CNY 15bn. Elsewhere, Turkey’s Borsa Istanbul 100 index dropped -9.3% 5d. Beyond the pressures from broader indices, the escalating rhetoric between Turkey and Russia also weighed on investor sentiment.
GCC Equity Flow Monitor - May 2020