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Aditya Pugalia - Director, Financial Markets Research
Published Date: 12 January 2020
It was a volatile week of trading for global equities as hostility between the US and Iran left investors confused about the end-game. However, both countries dialed back rhetoric towards the end of the week which provided a filip to risk-assets. The MSCI All Country index added +0.6% 5d on the back of strength in developed and emerging market equities. The MSCI G7 index and MSCI EM index added +0.7% 5d and +0.9% 5d respectively. Remarkably, volatility declined across the board with the VIX index, the V2X index and the VXEEM index dropping -10.4% 5d, -11.3% 5d and -18.0% 5d respectively.
The focus this week will be on the signing of the Phase 1 trade deal between the US and China. More than the actual signing, the details contained in the deal will be keenly watched by investors. Further, the focus will remain firmly on corporate earnings given that most major indices are trading near their all-time highs.
As we enter into Q4 2019 earnings season, it is interesting to note that profit forecasts rose faster in emerging markets compared with developed markets. In fact, the average earnings estimate for the MSCI Emerging Markets index over the next 12 months climbed to the highest level since middle of last year.
Most regional equity indices closed lower in a week which was dominated by spike in geopolitical tensions. Having said that, investor interest returned in second half of the week as worries of a prolonged conflict faded away. The S&P Pan Arab Composite index closed -0.6% w-o-w.
UAE bourses closed lower with the DFM index and the ADX index losing -0.7% 5d and -0.5% 5d respectively. The weakness was broad based with most market heavyweights losing ground. Emaar-related names were notable exceptions with Emaar Properties and Emaar Malls ending the week with gains of +0.3% 5d and +0.5% 5d respectively.
The Tadawul dropped -0.6% on the back of weakness in petrochemical stocks. Saudi Aramco closed lower for a fourth consecutive week with losses of -0.4% 5d. At the end of last week’s trading, Saudi Aramco confirmed that the over-allotment option was exercised which increased the offering size to USD 29.4bn as 450mn additional shares were placed at SAR 32 per share.
Developed market equities closed higher as the recovery in second half of the week more than offset the losses following the US-Iran tensions. Further, economic data from the Eurozone and the US were mixed but did indicate that the economy remains on reasonably solid ground. The S&P 500 index, the Euro Stoxx 600 index and the Nikkei index added +0.9% 5d, +0.2% 5d and +0.8% 5d respectively.
In terms of fund flow, European equities continue to see outflows. According to data from EPFR, European equities saw outflows of USD 1.7bn in the week ended 8 January 2020. Within the EU, UK equities also saw outflows of USD 495mn which in turn snapped an 11 week inflow streak.
As the Q4 2019 earnings season picks up pace next week, it is worth noting that the estimated earnings decline for the S&P 500 index is 2%. If the number holds then it will be the first time since 2016 that the index will report four straight quarters of y/y decline in earnings. So far, only 4% of S&P 500 index companies have reported earnings. According to FactSet, 84% of those companies have reported a positive EPS surprise and 74% have reported a positive revenue surprise.
Emerging market equities outperformed broader indices in a week where political risks came to fore. The MSCI EM index added +0.9% 5d compared to a gain of +0.6% 5d in the MSCI World index.
Turkish equities were notable outperformers with Borsa Istanbul 100 index adding +4.4% 5d. It appears that fading away of geopolitical tensions coupled with sharp decline in oil prices and better than expected corporate earnings guidance drove investor interest.
Global equities rallied sharply last week
Global equities closed higher
GCC Equity Flow Monitor