Market analysis: Volatile environment makes investors jittery

Global markets remain volatile, with geopolitical and macroeconomic risks at heightened levels. US interest rate hikes, a correction of the Chinese equity markets and Greece dominate investor sentiment.

US bond markets reacted negatively to strengthening economic data and increased GDP growth forecasts in the United States. The rebound in growth was driven by consumer spending, an improving housing market and a strong labour market. It appears increasingly likely that the first Federal Reserve rate hike will happen before the end of the year.

Greece has dominated European headlines for most of the second quarter, but most investors and politicians were blindsided by Alexis Tspiras calling for and winning a referendum vote against accepting austerity measures required to obtain further bailout funds.

EU firewalls have to date been successful, to a large degree, in containing a domino effect across the periphery. Chinese equity markets, after gaining about 150 per cent in a12-month period, corrected violently last month, leading to the Chinese government enacting a number of measures and controls in attempts to arrest the decline.

Against this uncertain global backdrop, the performance of Mena markets last month was quite divergent, with Saudi Arabia, Kuwait and Egypt ending in negative territory, down 6.2 per cent, 4.7 per cent and 1.4 per cent, respectively.

UAE markets performed well, with the Abu Dhabi Securities Exchange General Index rising 4.3 per cent. The UAE telecoms sector, buoyed by Etisalat, was the star performer as it rose 17.4 per cent. Etisalat announced that a proposal to allow 20 per cent foreign ownership of its shares had been approved by the government of Abu Dhabi.

The Dubai Financial Market General Index replicated the trend in Abu Dhabi, rising 4.2 per cent to close above the psychologically important 4,000 level. Amlak Finance captured investor attention after ending its suspension of almost six years. The stock rose 170 per cent.

The steep decline in the Saudi Arabian stock market and total trading value could be attributed to a number of factors such as weakness in oil price, lacklustre response on the authorisation of qualified foreign investors and limited retail investor participation during Ramadan.

At the sector level, the Tadawul Petrochemical Index declined by 6.3 per cent during the month, slightly underperforming the general index, which was down by 6.2 per cent. Rich valuation, a decline in petrochemical prices and profit-taking after the QFI authorisation were the main catalysts.

The UAE real estate sector rebounded strongly, driven mainly by small and mid-cap names such as Deyaar and Union Properties, which were up by 5.3 per cent and 16.2 per cent, respectively.

Shares of Emaar Malls remained flat despite its entry into the MSCI Emerging Markets Index in May. The DFM Real Estate Index rose by 5.6 per cent, outperforming the broader DFM Index.

The Saudi and Egyptian real estate sectors ended the month down 5.3 per cent and 8.2 per cent, respectively.

In Egypt, Emaar Misr, a wholly owned subsidiary of Emaar Properties of Dubai, completed its initial public offering, the largest on Egypt’s exchange in about eight years.

In the UAE banking sector, system-wide data highlighted loan growth of 3.9 per cent year-to-date and 8 per cent year-on-year. Deposits grew 1.8 per cent year-to-date and 4.8 per cent year-on-year. Specific provisioning continues to decline, with the specific provision to loans ratio standing at 4.9 per cent compared to 6.4 per cent a year ago.

An analysis of the sector’s performance in the first five months of the year suggests that UAE banks are likely to report mid-single digit profit growth for the year.

In Saudi Arabia, bank data for May placed loan growth at 9.6 per cent year-on-year – in line with our full-year loan growth expectations. Similarly, combined profitability of Saudi banks increased 3.6 per cent. It is important to note that the aggregate profit of Saudi banks has been distorted by one-off bonus payments to Saudi employees in January. We anticipate that Mena markets will still be highly volatile as investors react to escalating regional tension, shifting oil prices and geopolitical factors. However, we believe that most markets in the region would recover quickly from negative trends, as they are underpinned by solid earnings expectations and attractive valuations. Favoured markets in the Mena region include the UAE and Saudi Arabia.

Salem Khokhar is the head of fund management at NBAD.

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