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Global markets recovered to where they traded a fortnight ago, rebounding as swiftly as they sold off. GCC indices are significantly up for the week with Dubai at +7.1%, Abu Dhabi +1.3%, Saudi +6.5% and Qatar +4%. Markets are no longer in correction mode and whilst the spectre of slow global growth or low oil prices hasn’t reversed, investors are moderately optimistic on the ECB and the Fed intervention. Quarterly earnings are helping improve sentiment with a high percentage of US companies that have reported so far beating estimates.
In the GCC the worst performing sectors have been petrochemicals and industrials on account of oil trading at four-year lows. The oil sector seems to be oversold both globally and regionally; as crude oil continues to move upwards and stability returns, it should be a viable short term trade to buy into some of the higher yielding stocks or into global oil equity indices for a December recovery.
Results for Saudi banks were affected by weaker non-interest income, a seasonal impact of Ramadan, and by higher provisioning, which led to a 5.5% sequential drop in net earnings, yet representing 10.6% growth over 2013. Loan growth is estimated at 11%. Last week’s correction provides an opportunity to accumulate Samba, still our preferred play. Samba is trading at 11.3 X current earnings and 1.5X book value and with loans to deposits at 76% has plenty of room to grow.
Among Qatari banks we continue to like Qatar National Bank, which reported net income growth of 24% over last year. The beat is largely due to lower provisioning charges and higher non-interest income. The bank continued to improve its loan to deposit ratio up to 95%, with a capital adequacy ratio at 15.0%. Qatar is less dependent on oil prices, with a lower breakeven price of oil for its budget at USD 65 per barrel. Most of the UAE banks that have so far reported have shown substantial growth over last year, largely on account of lower provisioning and improved asset quality.
Regional bonds remain resilient to global shocks
In spite of the rout in global markets regional credit spreads held in relatively well. Better than expected Q3 corporate earnings, especially from UAE based banks, helped restore investors’ sentiment. Perpetual bonds were back in demand lifted by the rebound in risky assets. Turkish banks – Isbank and Development Bank TSKB, 50% owned by Isbank, and Yapi Kredi Bankasi –continued to tap debt markets by issuing 5-year notes and traded well on the secondary market.
Russia’s investment-grade credit rating was affirmed by Standard & Poor’s last Friday. S&P held Russia’s ranking at BBB- with a negative outlook. Currently Russia, Brazil and South Africa all hold the lowest investment grade rating at BBB-
US 10-year treasury yields surged from below 2 % to 2.26% as the flight to quality reversed and the global macro newesflow improved. This coming week will be quite eventful, seeing the outlook on US policy rates being released by the Federal Open Market Committee (FOMC) and the winding down of quantitative easing (QE).
Global equities rebound sharply on expectation of more stimulus
World equity markets have recovered swiftly from the high-single digit pullback elicited by a growth scare two weeks ago. Developed market (DM) equities are less than 6% off their all-time highs, while emerging market (EM) stocks staged nothing short of a dead-cat bounce and are more than 10% off their recent peak.
Although our preference is still for DM, EM as a whole have fallen disproportionately due to US growth fears and for economies geared to US dynamics, like Korea and Mexico, this should represent a buy opportunity.
In the US the Leading Economic Index rose nicely for the month of September and 80% of companies beat on earnings, while 60% on sales. On top of this Janet Yellen, the Fed chief, said the US Central Bank would cling to its bloated balance sheet, meaning it might take up to the end of the decade to bring it back to its normal, pre-quantitative-easing (QE) size. This will continue to depress US treasury yields, keeping the supply of treasuries limited, and thus to stimulate the US economy.
Fears on global growth were allayed as leading economic indicators for the month of October were above estimates in the Eurozone, in Japan and in China.
Overall we hold the view that volatility bouts represent buy opportunities for equities and especially for cyclical stocks, which are oversold, and in particular for European banks.
Among cyclicals it is worth mentioning consumer discretionary stocks, which benefit from low oil prices via increased purchasing power of consumers. Energy stocks underperformed substantially in the downleg and are ready to bounce before Winter time starts, usually positive for oil stocks. European banks should get a boost from the disclosure of stress-test and asset-strength results released Sunday by the European Central Bank (ECB), as transparency on their capital level is expected to support investors' confidence.
Renewed market weakness cannot be ruled out, in particular not even new lows, since investors remain quite sensitive to any piece of disappointing, growth-related news. We hold anyway the view that global growth trends remain intact, although sluggish, being supported by very proactive central banks in key economies. The trade-off is thus still in favor of a 'buy the dips' strategy.
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