Posted on September 10, 2014

The Saudi Arabian and the UAE Purchasing Managers Index (PMI) surveys reached historic highs in August at 60.7 and 58.4 respectively. Saudi Arabia’s non-oil private sector gained momentum for the third consecutive month in August. This was the highest PMI reading in more than three years. Output, new orders and new export orders all expanded at a faster pace last month on improving market conditions and stronger domestic and external demand. The Saudi government is subsidizing the hiring of Saudi nationals and offering better working conditions in the private sector. This will benefit labour-intensive sectors: retail, cement and construction, as they had been facing a paucity of manpower since the introduction of the labour reforms in 2011.

The main GCC equity indices are continuing to maintain their upward momentum with trading volumes supporting the trend. Qatari stocks – Qatar National Bank “QNB”, Qatar Islamic Bank and Industries Qatar – that had increased weightage in the MSCI Emerging Market Index (MSCI EM) are all reaching new highs. The Qatar index gained 4% last week, closing near a psychological barrier and at an all-time high of 14,039. QNB acquired a 12.5% stake in Ecobank, a leading pan-African Bank, increasing its MEA coverage and leading to increased strategic synergies in the region. Further synergies are expected as QNB continues with its inorganic growth strategy. Ooredoo, in the telecom sector which had been the only laggard, outperformed last week.

The Qatar Index is now trading above consensus target levels and seems to be momentum driven. The next driver would be the FIFA World Cup review. Emaar Properties, which accounts for approximately 10% of the UAE equity market cap, announced the IPO of its retail mall subsidiary to be listed on 2nd October. Meanwhile the World Economic Forum has ranked the UAE as the 12th most competitive nation globally for 2014-2015; positives include low crime, effective government and low bureaucracy. It is also rated as having the third best infrastructure in the world.

Interest in the Sukuk market continues

Although US 10-year treasury yields strengthened for the week on account of strong macro newsflow, they are stubbornly lingering below 2.5%, as if investors were not overly confident about US growth. The depressed level of long-bond yields in the US reflects not so much expectations of muted US growth to come, but rather the deflationary forces at work in Europe impacting the US outlook. Of late US long bond yields decoupled from short yields – which rose in response to an improving US economy and higher rates to come in 2015 – recording a pattern similar to yields in Europe.

The above has the consequence of allowing the Fed the luxury of winding down quantitative easing (QE) by October with little effect on yields, contrary to expectations. We reiterate US treasuries and the US currency currently continue to offer more value than European government bonds and the euro; some Eurozone sovereign bonds are offering negative yields at shorter durations due to the extraordinary measures taken by the ECB (see below).

Sukuk issuance continues unabated given low yields and investors’ interest in Shariah-compliant debt, scarce in absolute terms. The Government of Sharjah, the Republic of South Africa and Goldman Sachs – for the first time – to name a few, will be issuing dollar-denominated Sukuks in September. Emirates NBD, Burgan Bank and Turkish Airlines are also interested in accessing the bond market this month.

Fundamentals of regional markets have been improving significantly. For instance, Dubai’s CDS is currently trading at 155bps from 220bps at the beginning of the year. Emirates NBD’s CDS was at 217bps in January and is now at a 5 year low of 171.75bps. These factors will allow regional issuers to price aggressively, considering also that and the number of new issues in the region has been relatively limited over the past few months.

Global risk appetite supported by the ECB liquidity boost

The ECB moved adroitly to meet market expectations; at its policy meeting on Thursday it announced a rate cut – benchmark rates are now hovering close to zero in the Eurozone and banks have to pay even more to park liquidity with the Central Bank – and a much anticipated program of asset purchases. After the latest dismal data the ECB decided to ‘walk the talk’ of “doing whatever it takes” to rescue the economy from deflation and stagnation.

The ECB committed itself to purchasing a yet to be established amount of asset-backed-securities – loans packaged in notes – with the purpose of reviving credit creation, liquidity and eventually growth. This is an extraordinary measure which, as anticipated in previous issues of this publication, would weaken the euro – it dropped to 1.2950 for the first time since 2013 against the US dollar – and trigger an equity rally – European equity benchmarks bounced forcefully and the S&P500 recorded another all-time high.

In Europe growth stocks – technology – and financials in particular are expected to benefit the most from Draghi’s move. Banks will gain primarily from the possibility of offloading loans, creating liquidity and looking for new investment opportunities. Also, in a low-yield environment dividend yielding stocks will be appealing to more cautious investors.

On the other side of the pond the US economy is steady – the services sector is growing above expectations, labor data were disappointing, but helped allay fears of higher rates ahead – and the ECB move will, if anything, add fuel to the fire. At the same time Japanese stocks should benefit twice from an accelerating US business cycle and from a further weakening of the Yen, the Yen most likely depreciating further as a safe-haven currency in a risk-on environment.

Commodities still range bound

Disappointing US Nonfarm Payrolls data for August – 142,000 versus 230,000 expected – supported gold prices, which closed at $1,268 per ounce, after hitting $1,258. We see this as a blip in an overall positive US macro trend and reiterate our negative view on gold, which is expected to head eventually towards $1,200 per ounce. The oil market reacted negatively, also on the back of a truce between Ukraine and Pro- Russian separatists. Due to news of a possible ban on nickel from the Philippines, prices have broken resistance levels and are currently trading at $19,599 per ton. After the ban from Indonesia, the Philippines have emerged as the largest supplier of the metal to China, which is one of the top importers of nickel for the steel industry.

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