Welcome to Zawya Markets. Each Sunday we will be featuring an interview with a different analyst or markets expert from around the region.

If you would like to participate please email gerard.aoun@refinitiv.com.

1) What is your view for MENA capital markets, and to which markets do you expect to increase / decrease allocations in the near future?

With the inclusion of Saudi Arabia to the MSCI EM and FTSE Indexes, we will experience a new and sophisticated investor base coming into the region for the first time from both the active and passive money manager segments. Unlike other GCC and MENA markets, the Saudi market is not a market that can be ignored by money managers due to its weight in the index, which could substantially increase if the Aramco IPO was to go ahead in the next couple of years. As such, both active and passive mangers will require a weighting to that market. We would expect a spillover effect to other markets in the region, particularly from active mangers that would need to visit the companies in the Kingdom to make qualitative decisions around a possible investment in certain companies. This will benefit mostly GCC member countries in these indexes, predominately UAE and Qatar.

2) What are the biggest risk factors both for MENA markets and global markets in the coming weeks?

Geopolitics will play an important influencing role in regional markets in the next few months which will have a direct effect on commodity prices. Due to the current tensions around the tariff discussions, anxiety will remain elevated and as a consequence, have an impact on equity markets with emerging markets expected to underperform. Global monetary policy will also need to be closely monitored. The yard stick has been moved quite a bit from December when we were expecting rate hikes, to now, where the consensus in Fed fund expectations are for no rate rises this year and a possible cut thereafter.

3) If you were to pick one regional sector that you think will outperform over the next six months, which one would it be?

The banking sector continues to be an integral part of the economies in the MENA region and cannot be ignored due to its size, balance sheets and asset bases along with their heavy weightings in the indexes. As the region and particularly the GCC goes through its transformation, the banking sector will be an instrumental engine in that growth. Notwithstanding the retail sector in KSA which is also attractive in the medium to long term as the stimulus packages in KSA around Vision 2030 take hold.  

4) What is your view for 2019 Q1 earnings across the region?

Q1 results have been generally weak in the region, but with wide disparity among sectors. For example, in Saudi Arabia, aggregate Q1 profits were down 9% y-o-y but it was mainly driven by an exceptionally weak quarter in the chemicals sector (down 40% y-o-y). However, chemicals is a global sector, so if we are to look at the domestic sectors like banks and telecoms, they have fared better with high single digit growth, while the cement sector profitability bounced the most on export growth (+60% y-o-y). It’s somehow a similar story in the UAE, where the real estate sector continues to suffer and dragging with it the Dubai index, while banks heavy weight Abu Dhabi index is faring better. Kuwait remains the most stable in terms of earnings and market volatility, and could well be the place to be in the next 12 months on potential upgrade by MSCI to their EM index, a decision to be made in June 2019.

5) What is your view on the real estate sector in the UAE?

The UAE real estate sector particularly in Dubai has gone through a correction as added supply has come onto the market on the back of preparations for Expo2020. Supply should continue to come in earnest as the city prepares for the event and as such prices could continue to come under pressure in the near term. I believe the correction has mostly been realised and a stabilisation of some sort should start to take place towards the end of this year and into the beginning of 2020.

6) With Tadawul joining the MSCI emerging markets index this month, what position do you advise investors to take in Saudi Arabia? 

The Tadawul market has had a very good performance from the beginning of the year as active managers position themselves ahead of the MSCI inclusion. The performance of the index of late has been poor due to jitters that certain GREs will be using this MSCI liquidity event as an opportunity to off-load some of their oversized holdings in certain sectors without affecting prices greatly. We would think that most of these factors have been discounted with certain crosses taking place in the last few weeks that could warrant such a scenario. This is not to say that the GREs are in need of liquidity, particularly after some of the debt issuances that have taken place in the last 12-18 months, representing a large percentage of overall EM issuance. To us, this is an important factor that points towards minimal disposals needing to take place. We would therefore expect the market to stay well bid into the event and then cool off thereafter; we are also not expecting a severe correction after inclusion. Let’s also not forget the end of May will be the first of two tranches and market players would still need to be active buyers into the next tranche of inclusion in August.

7) Do you expect global growth concerns to keep weighing on investor sentiment throughout 2019? Or is it a temporary problem?

Global growth is an ongoing concern particularly that the US economy is experiencing one of its longest expansions ever with early signs that certain sectors are starting to cool off. The key will be tariff discussions, if a resolution can be agreed you would expect inflation to stay tame with the Fed remaining dovish. Prolonged discussions or worse, a no deal scenario, will have a negative effect on global economies and capital markets, and we would expect purchasing prices to start to inch higher which in effect will have a drag on GDP coupled with consumer confidence and spending being dented. The next few months will be instrumental in shaping the global economies for the foreseeable future.

(Editing by Gerard Aoun)


Any opinions expressed here are the author’s own.

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