Non-oil sectors in the GCC continue to expand
US yields soar on strong employment figures
No upgrades to global growth despite concerted easing efforts
GCC equities rebound with crude oil, although volatility is expected to remain
GCC markets showed strong performance across the board, with the DFM taking the lead and gaining +5.8% for the week. Crude oil continued to rally: both Brent and WTI benchmarks achieved double digit gains, the best week since 2011, with Brent crude rising 18% over the last 10 days alone. The Saudi Arabia's Tadawul index rose +3.6% weekly, making it the best-performing major market globally year-to-date (in dollar terms).
Oil prices continued to rebound as the number of oil rigs declined by 83 for the week (following a decline of 94 in the previous week, the biggest decline since 1987), according to press reports. Major oil producers including BP, Royal Dutch Shell, Chevron and Statoil reduced longer-term investment plans as a result of lower crude prices. However, oil price volatility is expected to remain as crude inventories expanded to 413mn barrels at the end of January 2015, according to Energy Information Agency data. Oil traders in Europe stored an estimated 5.8mn tonnes of oil products, the highest since data going back to 1995. Saudi Arabia cut prices for March exports to Asia, indicating it is continuing to fight for market share.
The headline Purchasing Managers' Index (PMI) for Saudi Arabia was broadly unchanged in January at 57.8, and for the UAE slightly higher at 59.3, both well above the 'neutral' 50 level, indicating that the non-oil sector is still expanding at a robust rate. The PMI readings from the GCC suggest that the non-oil sectors have, so far, weathered the fall in oil prices. The growth in non-oil sectors tends to be driven by government spending, which is financed out of oil revenues. At this point, there is no indication of any major cuts in expenditure, however the longer term outlook depends on how long oil prices stay at current depressed levels. We expect GCC markets to take their cue from the trend in oil prices.
We continue to advocate that investors overall should have diversified portfolios across both asset classes and geographies. In anticipation of further volatility in crude oil prices, we are defensive in relation to GCC markets and continue to prefer sectors which benefit from non-discretionary spending, have strong cash flows, high dividends and input cost advantages, namely the consumer, cement, telecoms, and banking sectors.
In India expectations are running high for the Union budget at the end of February
Indian equity markets continue their strong performance in 2015 with the Nifty index rising 8.3% in USD terms in January. Equities have been supported by the drop in oil prices, low inflation, the beginning of policy rate cuts by the RBI (Reserve Bank of India) and Quantitative Easing (QE) from the European Central Bank (ECB). Foreign Institutional Investor "FII" inflows remain strong. The Nifty is currently trading at 17X expected earnings for 2016, with consensus earnings growth in the mid-teens. India is now second only to China in terms of GDP growth. The next catalyst for Indian markets is the Union budget to be presented at the end of February, which is expected to provide direction on taxes and on fiscal consolidation.
Oil rebound drives relief rally in EM bonds, whilst US Treasuries sell off
A strong unemployment report in the United States, as well as the rebound in crude oil prices paved the way for a risk-on session in Emerging Market (EM) bonds and in particular in the GCC. US treasuries continued their sell off, with yields on 10-year notes adding 23bps to 1.95%, while 10-year German Bunds and UK Gilts weakened to 0.37% and 1.64%.
Investors kept a close watch on the latest developments in Brazil and Turkey in particular. The appointment of Aldemir Bendine (former head at Banco do Brasil) as the new CEO of Petrobras, failed to boost investors' confidence in the major Brazilian oil giant, and we maintain a bearish stance on all of Petrobras' outstanding debt. While we are uninspired by the newly-appointed board at Bank Asya, overall we remain constructive on Turkish sovereign and corporate debt, given the country's heavy reliance on energy imports made less onerous by the slump in crude oil.
On the new issuance front, NBAD priced a USD 750mn, 5-year bond at a fixed rate of 2.25%, 85bps above benchmark. The deal was well placed across European and GCC accounts, taking 46% and 40% of the transaction respectively. First Gulf Bank is meeting investors this Monday for a potential bond deal.
The PBOC joins the easing bandwagon
The global fight of central banks against sluggish growth continues, as the People's Bank of China (PBOC) announced further easing of its monetary policy (by reducing the reserve-requirement-ratio), after cutting interest rates in November last year, to offset liquidity outflows and boost lending. China's central bank has reacted on the ongoing weakness of the Chinese economy, with imports falling the most in five years, compounded by capital outflows caused by heavy investments of domestic companies overseas.
More easing is expected in 2015, to stem the slowdown of the industrial sector and support lending activity following a property downturn, using a variety of instruments to prevent the Renminbi from weakening significantly. Equity markets in China have already responded positively with an impressive rally and should offer further upside, probably in the low double digits, as investors become more confident about the growth outlook and valuations continue to expand. This vindicates our bullish call on Chinese banks, the main beneficiaries of the easing measures alongside property developers, brokers and insurance companies. The loosening of financial conditions should positively affect corporate earnings albeit with a lag, most likely in the second half of the year, which is also the most favorable for Chinese equities according to historical data.
Upgrades to global growth the key to further equity upside
The monetary easing by the PBOC follows QE by the ECB, interest rates cuts in some major countries like India, Switzerland, Turkey and Canada in January 2015 and Australia in February. Despite the concerted efforts of central banks, investors could become nervous about the unabated deflationary pressures and the lack of upgrades to global growth, which is currently forecast to be slightly below 2.8% in 2015. The International Monetary Fund (IMF) Chief Christine Lagarde on Friday urged the Group of 20 Major economies to take steps to support the global recovery. We continue to expect increased global market volatility in the short term, until the positive effects of low crude prices and increased money supply eventually manifest and boost the business cycle.
The decision of the new Greek government to renegotiate the conditions of the bailout of Greece, is one more source of uncertainty in the short run. The ECB President Mario Draghi, unconvinced of the commitment of the newly-elected leaders to continue on the path of reforms, suspended a waiver on Greek collateral, which has resulted in an increase in the cost of funding for Greek banks. The new leaders are now under increased pressure to quickly find an agreement on the new terms of financing with the so-called Troika (ECB, IMF and European Commission).
We advise investors to purchase European equities on weakness, as the economic outlook for the Eurozone improves. The European Commission has revised up its economic forecasts for the region for 2015 and 2016, taking into account the joint benefits of QE, the weakness of the common currency and depressed crude oil prices.
In the US, economic data released continues to show strong momentum. Non-farm payrolls for January overshot expectations significantly, and figures for November and December were revised higher - largest 3 month advance in 17 years. January's strongest consumer confidence numbers since August 2007, favorable employment numbers and lower gasoline prices support our increased conviction on the potential outperformance of consumer discretionary stocks.
-Ends-
CIO Office
Richard Jablonowski Chief Investment Officer, London
Anita Gupta Equity Strategist
Giorgio Borelli Asset Allocation Specialist
Irfan Ellam Equity Strategist
Raman Trehan Forex and Commodity Strategist
Syed Yahya Sultan Fixed Income Strategist
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