Market analysis: Investor value to be found in stormy waters

The year started off on a difficult note with markets – developed, merging and regional – correcting sharply.

Fears of a global economic slowdown have hurt investor sentiment, especially oil prices which are seen as a leading indicator for global growth despite the many nuances involved.

Oil touched a low of US$27 per barrel in mid-January, stoking deflation fears and global growth concerns. The US 10-year treasury yield remains below 2 per cent as investors look for safe havens and markets attributing a low probability to the US Federal Reserve’s scenario of two to three increases of 25 basis points each this year.

Recent global macro data also painted a negative picture for economic growth. In China, PMI data continues to show a declining trend and US fourth quarter GDP grew by a mere 0.7 per cent. The World Bank also reduced global growth target for 2016 to 2.9 per cent from its previous forecast of 3.3 per cent.

The flow of negative macro news has forced central banks and policymakers to reassess, and take corrective action. The Fed left benchmark rates unchanged, mentioning that it will be patient and require further time to assess the global economy before any further rises are considered. The European Central Bank signalled further monetary easing and Bank of Japan adopted negative interest rates of -0.1 per cent aiming to achieve a medium term inflation target of 2 per cent and offsetting risks to growth. These steps have clearly supported the markets and we have seen a modest recovery.

However, the key question remains – is the global economy heading into a recession, or has the market overreacted to a moderately slower growth environment? We are of the view of the latter.

Over the past two weeks, the crude oil price has remained quite volatile but recovered from its lows on reports of a possible production cut by oil-producing countries, including Saudi Arabia and Russia. The buoyancy in the oil market came after comments from the Russian energy minister stating that Russia, Saudi Arabia and Arabian Gulf allies are ready to cooperate, along with others, to bring stability to the market. Oil has since gained 33 per cent from its low. The oil price gave up some of its gains towards the end of last week as the US Energy Information Agency data indicate that production has been resilient in the America and inventory levels continues to rise. We are of the opinion that supply demand equilibrium will be reached during second half of this year.

In the Mena region, companies have reported a mixed set of quarterly results. To date, 100 out of 178 companies in the S&P Pan Arab Large-Mid cap index have reported results for full year 2015; earnings were 4.2 per cent below market expectation mainly because of lower than expected earnings from the oil and gas and utilities sectors. However, consumer goods and industrials delivered positive earnings surprises for the fourth quarter of 2015.

Most Mena companies, with the exception of Qatari firms, have either maintained or increased dividend payouts for 2015. The results overall were above those that were being implied by the extreme fear and negative sentiment prevalent in the market. The general tone of management guidance for 2016 has been cautious and we believe that most regional companies are now quite geared towards a challenging year ahead.

In sum, we believe regional markets will remain quite volatile in the near term but we are of the opinion that fundamentals and valuations of many stocks are extremely attractive for those willing to take a medium to longer view.

Saleem Khokhar is the head of fund management at National Bank of Abu Dhabi.

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