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Published Date: 21 June 2020
Notwithstanding mixed economic data and a surge in new coronavirus infections across economies, global equities managed to end the week higher. Central banks remained at the fore in shoring up investor confidence as they continued to expand their balance sheets and ease monetary policy further. The Federal Reserve came through on its earlier promise of buying individual corporate bonds under a facility which had so far purchased only ETFs.
Overall, the MSCI All Country index added +1.8% 5d on the back of strength in most sub-indices. The MSCI G7 index and the MSCI EM index added +2.0% 5d and +1.5% 5d respectively. Volatility eased across markets with the VIX index, the V2X index and the CBOE EM ETF Volatility index dropping -2.7% 5d, -22.2% 5d and -16.4% 5d respectively.
The focus this week will be on first-tier economic data from developed economies and central bank decisions in Turkey and Egypt. Investors will also keep an eye on results from the Fed’s stress tests on US large banks as any restrictions on the ability of banks to pay dividends would depend on the results.
With equity markets close to erasing their year to date losses, the disconnect between price performance and corporate earnings is becoming stark. US corporate earnings dropped 16% in Q1 2020 and are expected to fall further in Q2 2020. Similarly, consensus forecasts show that the net income margin is expected to drop by 2.2% in 2020 to 9.5%. The net income margin peaked in January 2019 at 12.3%. Price performance generally has a positive correlation to earnings and margins.
Regional markets recovered marginally from the losses of the previous week. With regional markets lacking a catalyst of their own, they have started to track the moves in global markets. The S&P Pan Arab Composite index added +1.2% 5d.
Aldar Properties added +3.5% 5d amid reports that Mubadala Investment Co is weighing the sale of a mall and other real estate assets including Abu Dhabi Global Market district to the company. If the deal fructifies then it would add to Aldar’s asset management business and improve its recurring income stream.
Elsewhere, Saudi Arabia moved into the final phase of easing as starting this week the country lifted restrictions on movement and allowed resumption of all commercial activities. However, international activities continue to be banned. The Tadawul ended last week with gains of +0.6%.
Developed market equities closed higher as investors turned their focus again on positives and largely shrugged off any indications of a renewed surge in the viral outbreak or warnings over economic outlook. The Bank of England added GBP 100bn to their bond buying program citing risk of ‘higher and persistent unemployment’ with repercussions for economic growth and inflation. Further, at the EU’s first debate no consensus was reached on the proposed EUR 750bn economic recovery plan. With little progress made at this meeting, leaders agreed to meet next month in person to reach an agreement.
Overall, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index added +1.9% 5d, +3.2% 5d and +0.8% 5d respectively. The trend of European equities outperforming their developed market peers continued with the Euro Stoxx 50 index now adding +12.5% 1m compared to gains of +6.1% 1m in the MSCI G7 index.
Emerging market equities closed higher but underperformed the broader index. The MSCI EM index added +1.5% 5d compared to gains of +2.1% 5d in the MSCI World index. BRIC indices outperformed despite hostility between India and China on their borders. The MSCI BRIC index added +2.4% 5d with India’s Nifty index and China’s Shanghai Composite index rallying +2.7% 5d and +1.6% 5d respectively.
Elsewhere, central banks in Brazil, Indonesia and Russia cut interest rates. These central banks left the door open for more monetary easing. Another notable outperformer was Turkish stocks. The Istanbul 100 index gained +3.4% 5d to trim its year to date losses to only -0.7%. It is worth highlighting that Turkish equities saw net inflows from foreign investors for the first time in five months. According to data from Turkey’s Central Bank, foreign investors bought stocks worth USD 50mn in the week ended 12 June 2020.
GCC Equity Flow Monitor - May 2020