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Aditya Pugalia - Director, Financial Markets Research
Published Date: 27 January 2019
It was a week of two halves for global equities. While the first half was subsumed by concerns over economic growth following a downgrade by the IMF, the second half brought some cheer following a temporary end to the US government shutdown. In between, optimism remained over Brexit and trade talks between the US and China. Overall, the MSCI All Country index added +0.2% 5d with all major sub-indices closing in positive territory. Volatility eased further with VIX index and the CBOE EM ETF Volatility index dropping -3.5% 5d and -1.2% 5d respectively. However the V2X index (Europe) rose +3.5% 5d.
This week is laden with important events. They include the first US Federal Reserve meeting of 2019, another UK Parliament vote in the Brexit saga and the second round of trade talks between the US and China. All of these events carry the potential to drive equity market movements given that a positive outcome appears to be already priced in markets. Additionally, we will also have key economic data and further corporate earnings.
Ahead of the Federal Reserve meeting later this week, it is worth noting that the Bloomberg US financial condition index has moved back into positive territory but remains well off the highs. The index tracks the overall level of financial stress in the US money, bond and equity markets to help assess the availability and cost of credit. The Federal Reserve is widely expected to signal a halt in monetary policy tightening after its first meeting of 2019.
It was a rather subdued week of trading for regional equities amid mixed earnings season and weak global backdrop for better part of last week. The S&P Pan Arab Composite index added +0.5% 5d.
The latter part of the week was dominated by earnings from petrochemical companies, most of which disappointed. Sabic reported 2018 earnings of SAR 21.5bn (+17.0% y/y), missing consensus estimates of SAR 23.67bn by 9%. The company attributed the weaker than expected growth to increase in selling, general and administrative expenses and lower income from associates and joint ventures. The stock closed -1.8% 5d lower ahead of the earnings. Advanced Petrochem also reported full year earnings of SAR 717mn that missed consensus estimates by 3.5%.
The concurrent theme of consolidation in the region’s banking sector continued. Kuwait Finance House offered to buy Ahli United Bank in a share swap deal. The bank recommended 1 share for 2.325581 Ahli United Bank shares. If the proposed deal is successful, then it would potentially create the region’s sixth-biggest lender with USD 92bn in assets. Based on last week’s closing prices, the offer price represented a 17% premium for Ahli United shareholders. Kuwait Finance House dropped -2.2% 5d while Ahli United Bank rose +6.3% 5d.
According to reports, Saudi Arabia will launch a USD 425bn infrastructure plan early this week. As part of its plan to diversify, the Kingdom will seek these investments over the next decade in sectors of energy, mining and other industrial projects.
Developed market equities closed mixed despite gaining strength in the second half of the week. A temporary truce in US government shutdown talks, continued speculation over US and China trade talks and markets playing up reduced chances of a no-deal Brexit fed into optimism amid mixed corporate earnings and concerns over growth trajectory. The European Central Bank acknowledged in its meeting last week that risks to the outlook over European economy has tilted to the downside. The S&P 500 index, the Euro Stoxx 600 index and the Nikkei index ended the week -0.2% w-o-w, +0.2% w-o-w and +0.5% w-o-w respectively.
The moves this week suggest that equities may be nearing the end of snap-back gains from sharp sell-off towards the end of 2018. In fact, this was the smallest weekly move in the MSCI G7 index since the middle of 2017.
The earnings season in the US continues to exhibit strength in some pockets but overall has remained weak. With 22% of companies in the S&P 500 index having reported earnings, 71% of companies have reported a positive EPS surprise and 59% have reported a positive revenue surprise. However, according to FactSet, the blended earnings growth is 10.9% compared to estimates of 12.2% at the end of 2018.
Emerging market equities continued their positive run. The MSCI EM index (+1.4% 5d) closed in positive territory for a fifth consecutive week to close at its highest level since October 2018.
Turkey’s Istanbul 100 index was a notable outperformer for a second consecutive week with gains of +3.4% as political risks continue to recede. The index is among the top three outperformers so far in 2019 with gains of +12.7% in USD terms. The index is currently trading at 6.8x 12m forward earnings compared to the MSCI EM index which is trading at 11.7x 12m forward earnings.
Global equities closed higher
GCC Equity Flow Monitor