Last month again proved to be mixed for global risk assets with developed market equities outperforming emerging market equities, the dollar continuing to strengthen and commodities in retreat.
In the United States, markets are struggling with temporary volatility because of the uncertainty about the timing of the first rate increase.
Indeed, a week ago futures markets were suggesting the first Federal Reserve rate rise would most likely occur in December or January, now they are more focused on September or October. The major change was the last statement from the Fed chairwoman Janet Yellen that the Fed remains on course to raise rates this year and the surprise bounce in core inflation.
In Europe, Mario Draghi, the European Central Bank president, repeated his commitment to pursue quantitative easing as long as there is no material pickup in investment, consumption and inflation in the euro zone.
Over the past two weeks, the sell-off in the euro zone sovereign bond market has put yields back at or above their levels at the beginning of the year. This has produced some pressure on the euro-dollar cross and a fall in European equity markets.
Within fixed income, the strong rise in government bond yields over the past month implicates total returns turned sharply negative, in particular for bonds with long maturities. Growth in many emerging markets, including China, continues to witness lacklustre performance.
The Mena markets were soft despite solid first quarter earnings. Banking and property sector numbers were generally ahead of expectations.
Concerns remain on the global interest rate outlook, weaker oil prices and escalation of tension over a number of regional issues involving Saudi Arabia, Yemen, Syria and Iran.
Most Mena markets gave negative returns for May with Abu Dhabi -2.6 per cent, Dubai (-7.2 per cent), Saudi (-1.5 per cent), Qatar (-1 per cent) and Kuwait (-1.3 per cent). Oman and Egypt were exceptions with positive performance of 1 per cent and 1.3 per cent, respectively.
The petrochemical sector, after a strong performance in late March and April succumbed to profit taking as average polymer prices fell by about 3 per cent. Lower oil prices have significantly affected planned investments in the energy sector and it is anticipated that it will take one to two years before supply demand equilibrium is attained.
Egypt benefited from positive news on a number of fronts as the government decided to delay the levy of a 10 per cent capital gains tax for two years and maintained a 10 per cent tax on dividends. The ratings agency Standard & Poor’s revised Egypt’s outlook from stable to positive, affirming the B- rating. We expect liquidity to decline and volatility to increase in Mena markets during Ramadan and summer. Post Ramadan focus will move to second quarter earnings numbers. We are of the opinion that consensus estimates are achievable across most sectors.
A closely watched event will be the opening of Saudi equity markets to qualified foreign investors on June 15, investor sentiment on this development remains positive but operationally it may take some time before any significant foreign inflows materialise.
Speculation regarding the Fifa World Cup hosts for 2018 and 2022 has mounted and the expectation of further scrutiny of Qatar’s successful bid for the 2022 event remains a concern. Sentiment aside, it is important to understand that infrastructure and project spend in Qatar will remain sizeable regardless of the World Cup.
A number of initial public offerings are expected in the second half of the year adding to overall liquidity, depth and diversification. Regional markets remain attractive in the medium to longer term but short-term volatility is expected. Should volatility increase over the summer months we at NBAD Global Asset Management would look to tactically reposition towards sectors that exhibit attractive fundamental valuations and benefit from resilient consumer demand.
Saleem Khokhar is the head of fund management at NBAD Global Asset Management.
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