Global Macro
Global economic growth has been forecast at 2.7-3.0% for 2013, much slower than the historical rates of 4-5% which the world economy realized prior to the global financial crisis. The IMF argues that the probability of global growth falling below 2% in 2013 has risen to 17% in Sep 2012 from just 4% in Apr 2012. It is noteworthy, that a 2% growth rate is consistent with recession in Advanced economies and a serious slowdown in Emerging economies.
The IIF has forecast growth in Advanced economies to decelerate to 1.0% in 2013, with those for the US, Euro-area and Japan pegged at 1.9%, -0.1%, and 0.4% respectively. Emerging economies are also expected to see a slowdown in growth, with a forecast aggregate of 5.4% for 2013, though the Asia-Pacific region is expected to do better with an average growth rate of 7.1%, led by China, Philippines, India, and Indonesia. Latin American and Emerging European economies are forecast to grow at 3.7% and 2.5% respectively in 2013.
As witnessed in recent history, policy uncertainty is harmful to economic growth and hence the growth outlook hinges on political consensus and policy credibility, especially in the US and the Euro-area. In the US, bi-partisan agreement resulted in tax increases on high income earners but left the spending cuts and debt ceiling un-resolved until well into the first quarter of 2013.
Policy measures in the Euro-area and by the ECB have helped to maintain unity and preserve the common currency. However, social tensions have continued to build up, as austerity measures alone are seen counter-productive from the perspective of economic growth and employment.
In 2013, core inflation will likely remain subdued at around 1.7% for Advanced economies, while rising to 5% in Emerging and Developing economies. Large economic slack in many Advanced economies and less pressures on capacity utilization in Emerging economies remain conducive to declining inflation as both oil and non fuel commodity prices are projected to decline.
Downside risks to global inflation reside in escalating food prices and a sharp spike in oil prices largely due to geopolitical tensions. Also, the aggressive global monetary easing, thru central banks' balance sheets expansion, is an inflation threat as it leads eventually to a significant rise of the money supply, thus igniting inflation.
GCC Macro
During 2012, the OPEC Crude basket averaged around USD 111 per barrel, and is expected to average around USD 102-105 per barrel during 2013, offering a comfortable buffer over most budget forecasts in the region. Risks to the outlook stem from the fragile global economic growth and increase in oil production by OPEC members, notably Iraq and Libya. The import trend in the US, which is increasingly becoming self-sufficient in its energy needs, also poses a medium-term risk to Oil prices.
It is anticipated that the GCC economies would have realized a cumulative growth of close to 7% during 2012. Recent announcement from the Saudi Central Department of Statistics that pegged Saudi Arabia's GDP growth in 2012 at 6.8%, validates the assumption. This figure is gratifying since it is quite comparable to GIC's internal estimates during 4Q 2012, that forecast the Saudi GDP growth for 2012 at 6.6%.
Recently two GCC economies have announced budget estimates for 2013. Oman announced the 2013 budget plan based on an assumed oil price of USD 85/barrel, and estimated production of 930,000 bpd. Public Expenditure is set to rise by nearly 29% over 2012 forecasts to USD 33.5bn, while Revenues are forecast at USD 29.12bn, resulting in a deficit of USD 4.4bn, translating to 15% of Revenues and 5% of the GDP.
In Saudi Arabia, the 2013 budget projects an 18% y-o-y increase in Revenue to USD 221.1bn, and a 19% rise in Expenditure to USD 218.7bn, with a forecast surplus of USD 2.4bn. In contrast, actual realizations for 2012 indicate that Revenues reached an all-time high of USD 330.4bn, representing an increase of 76% over the budgeted figure. Actual expenditure touched USD 227.5bn, 23.6% higher than the budgeted figure for 2012.
GCC Equity Markets
During December, news emanating from the US, Europe and Asia continued to cast a shadow over regional markets. The uncertainty over the US "fiscal cliff", alongside other global concerns such including the ongoing fiscal problems in the Euro-area, that cast its shadow over global markets, had an adverse effect on GCC markets as well.
The S&P GCC Composite Index added +2.21% for the month, extending its gains for the year to +7.14%, amidst mixed performance from the individual markets. While Saudi Arabia and Oman were the largest gainers, Abu Dhabi emerged as the worst performer for the month.
Oil prices witnessed some momentum, as Brent and WTI Crude notched up net gains of +0.78% and +2.60%, on the back of improved sentiment and the seasonal demand for heating oil in the US and Europe.
Despite the sentiment in global markets, the Saudi markets appears to have garnered some strength from firm Oil prices during the latter half of the month, causing the Tadawul index to add +4.10%. The large-cap PetChem and Industrials sector were key drivers, while the Investment sector also scored big. Oman's MSM 30 index added a similar +4.10%, with the Banking sector emerging as the biggest gainer.
Bahrain's BSE index managed to end the year on a good note with a net gain of +1.60% for the month that helped to trim its YTD losses, as the Banking sector emerged the best-performing for the month. Dubai's DFM index capped a good year with a modest gain of +0.91% for the month, as the Telecom and Insurance sectors dragged gains elsewhere.
Abu Dhabi's ADSM index shed -1.63% to close as the least-performing market for the month, dragged by the Telecom and Insurance sectors. Kuwait's KWSE Weighted Index edged moved down by -1.47%, with the Telecom and Real Estate sectors being the least-performing. Qatar's QE index rounded up the laggards with a net loss of -0.50% for the month.
In terms of relative performance for the year, It is noteworthy that the S&P GCC under-performed the MSCI World and EM indices, with a net gain of +7.14% compared to +13.18% and +15.15% respectively.
Dubai's DFM index clocked the largest gains of 2012 with +19.89%, with the ADSM index in neighboring Abu Dhabi closing a distant second with +9.52%. While the Saudi Tadawul added +5.98% for the year, Kuwait's KWSE (Weighted) index managed +2.97% and Oman's MSM 30 added a +1.15% for the year.
Bahrain's BSE index remained the biggest laggard for 2012, with a net loss of -6.83%, while Qatar's QE index shed a net -4.79% for the year.
It is understood that global economic status remains a large influence on the GCC markets, and a key factor in determining its direction. To that end, GCC equities are primarily driven by perceptions as opposed to fundamentals.
During 2011, corporate earnings in the GCC grew by around 20% while economic growth was north of 4%, but this was not translated into the markets, as all of them, with the exception of Qatar, closed in negative territory.
Economic developments in the US and Euro-area, including ongoing discussions on the budget and debt levels, will remain key influences on international markets in the short run, with GCC markets taking their cue from these developments.
In the long run, however, there are a myriad of factors that are likely to drive the GCC markets forward, including the recent disclosure of the Saudi budget for 2013 which promises continued expenditure on infrastructure, educational and health programs.
GCC Credit Markets
Global financial markets took a deep sigh of relief as Washington avoided debilitating tax hikes and spending cuts. Nevertheless, markets are fully cognizant that much more needs to be done if the US' fiscal position is to be stabilized. Of critical importance is the adoption of a credible strategy to curb US government outlays over time. Meanwhile, US reported a better than expected 3Q GDP growth of 3.1% Q-o-Q and a strong US consumer spending numbers. Elsewhere, China reported an unchanged PMI of 50.6.
GCC markets continued their upward march, managing to close at highs. Spreads tightened during the month. The HSBC Nasdaq-Dubai GCC USD Sukuk/Bond TR Index (GCCB) rose m-o-m, to close at 158.21 from 156.83 and spreads tightened by 22bps, yielding 3.21%.
The HSBC Nasdaq-Dubai USD Sukuk TR Index (SKBI) increased marginally m-o-m from 145.94 to 146.50, while the HSBC Nasdaq-Dubai GCC Conventional USD Bond TR Index (GCBI) traded in a range of 160-162.
The HSBC Nasdaq-Dubai GCC Conventional USD Bond TR Index (+0.99%) outperformed the JPM EM Bond Index (+0.93%). In the CDS Sovereign space, tightening of spreads was witnessed across the space. Investment grade outperformed the High volatility names led by Saudi 7bps (-8.9%), Qatar 6bps (-7.2%) and Abu Dhabi 5bps (-6.8%). Dubai tightened by 3bps (-1.5%).
Primary market was pretty active with slew of issuances. Taqa was first to tap the market with dual tranche USD 2bn issuance. The 5Y trance of USD 750mn was priced at T+200bps, while 10Y USD1.25bn got priced at T+210bps. Other big issue was USD1bn 10Y by Q-Tel issued at a margin of T+1.75%.
There were also benchmark issuances by banks namely Gulf International Bank ("GIB") and Union National Bank ("UNB") which got priced at tighter end of the guidance. Burgan bank also tapped the market with a record KWD100mn bond sale. It was issued in fixed and floating rate tranches. In the first five years, the fixed-rate bond pays 5.65% annually while the floating pays 3.90% over the CBK discount rate, capped at 6.65%. The issue was 4x oversubscribed.
The market is looking bit stretched with rich valuations post the sharp run up in 2012. However, resolution of US fiscal cliff, greater allocation to EM debt, lack of supply in primary market and search for yield will aid the market. We recommend a very cautious approach with defensive positioning and advise against chasing the market. Overall, in ST, we expect the market to consolidate.
In the Mid-Long term, the GCC market is expected to perform well given the supportive macro-fundamentals and positive news flow from international space primarily return to growth trajectory and continued monetary expansionary policies by major economies. GCC credit still continues to trade cheap when compared to its rating class. It also benefits from a very supportive investor base. However, the upside seems to be capped, given narrow spreads and low yield.
We recommend Investment Grade and defensive credit primarily out of Qatar, Saudi and Abu Dhabi over High Volatility, till the global uncertainty recedes. We also like Quasi Sovereign names especially in Abu Dhabi, given the attractive spread pick up over sovereign. Given the run up in the far end of the curve, global uncertainty and volatility in UST, we suggest underweighting duration. Spread curves for some of the Investment grade names are trading flat, providing an opportunity for possible curve steepening.
We also advise to selectively look at High Volatility space especially Dubai. Dubai economy has surprised on the upside and technical remains strong. With most of the credits in Dubai being rated BBB, the spreads are still at levels of B+/BB credits.
The Mid CDS spread between Dubai and Abu Dhabi at present is c.135bps from 340bps at beginning of the year. We expect it to tighten further in ST-MT. We remain neutral financials given the tight spreads, expected supply and sharp run up.
-Ends-
© Press Release 2013
