Posted on March 13, 2014

Qatar equities witnessed a quick rebound despite an initial fall in response to regional political uncertainties, which may have kept regional markets quiet last week.

The rebound reflects the bullish sentiment among regional investors who have shrugged off geo-political uncertainty even as economic fundamentals keep improving in the region and over in the US. While we maintain our view that the main risk to the bullish sentiment in GCC markets this year would be an abrupt fall in oil prices, regional political uncertainties could add another element of uncertainty. We therefore continue to advise our clients to diversify their investment portfolios internationally. Our preference would be to be overweight in the US and Japan whose economies are on the mend.

Meanwhile, within the GCC we would look for bargains in the equity and bond markets whenever they arise.The Qatar equity market is cheaper than the UAE equity market despite the fact that both equity markets will be included in the MSCI Emerging markets index in May 2014. We like Qatar National Bank – trading at a discount to peers in spite of its solid asset quality – and Doha Bank, boasting a dividend yield of over 7% and a strong corporate loan growth.

Fixed income in the region continues to be expensive as compared to historical averages and offer lower yields than comparable emerging markets in other regions. We still advise buyers of regional bonds to be cautious. Investors with a trading mindset could take some profits in order to exploit opportunities should volatility rise again.

There are several issues that could cause another bout of ‘risk-off’ investor sentiment in the months ahead. These include:

  1. News that China has seen the first outright default by a company which borrowed funds from a trust company
  2. News that western powers are sending troops into eastern Poland to face-off the build-up of Russian troops in Crimea
  3. The possibility that the continued reduction of money-printing by the US central bank will cause more stress for over-borrowed emerging markets with external trade deficits

At a global macro level good data in the US – employment, leading indicators and consumer confidence – as well as in Europe – industrial surveys, retail sales – offset quite some bad news on the geopolitical front out of Russia, and on the corporate front from China.

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Overall the whole emerging market (EM) complex – equity or credit – remains unappealing, as in key countries such as China, Russia and Brazil monetary conditions are tightening and the business cycle is not expanding at the desired rate. We thus advise once more to avoid EM risky assets, while in fixed income investors should look for hard-currency, senior-structured debt with duration in the middle of the yield curve.

For instance the bond issued by Brazilian mining giant “Vale” – the largest producer and supplier of iron ore and the second largest producer of nickel in the world. – offers YTM of 4.50 % for its January 2022 maturity. We also reiterate our conviction ideas – the perpetual bonds issued by Majid Al Futtaim group in Dubai, Aesgen in Chile, and the bonds issued by Kuwait Projects.

In general we do not see significant new opportunities across asset classes: where there is some growth – as in developed markets (DM) – valuations are no longer cheap and where valuations are appealing the outlook is quite uncertain, as in EM. So it seems more uneventful weeks may be in the offing.

A key event next week will be the meeting of the US Federal Reserve Bank Open Market Committee (FOMC) whose decision on whether to continue reducing its money-printing targets will have a significant bearing on financial markets. In particular, the economic performance of large emerging markets with balance of payments deficits such as India, Indonesia, Turkey and South Africa will depend on the FOMC decision and its consequences for sovereign borrowers in global capital markets.

For prices to find direction again, either economic data must improve again after the bad-weather soft patch, or volatility must come back and make assets blatantly cheaper.

In this context we do not see scope to add to existing positions and we reiterate the value of a well-diversified portfolio and of our themes – DM assets in the equity and credit space along with GCC exposure – as the main proposition to manage potential risks ahead.

Commodities have been challenged by the Chinese negative news flow,but platinum and palladium have managed to achieve our short-term targets, US$ 1480 & US$ 780 an ounce respectively. They may proceed ahead towards their second targets – US$ 1525 & US$820 – if no resolution is found to the ongoing strikes at the world’s top-producing mining sites.

We do not see continued upside pressure on gold prices as Chinese physical demand is increasingly exhausted at higher levels, unless the US Federal Reserve decides to alter the tapering path set-out at previous meetings.

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