Emirates NBD points investors towards Arabian Gulf and developed markets

Emirates NBD tells its wealth management clients to keep investing more in developed markets over emerging ones due to better corporate earnings

Earnings per share in developed markets are expected to grow 11.6 per cent this year versus 4.2 per cent in emerging markets, according Emirates NBD. Sammy Dallal / The National

Emirates NBD, Dubai's largest bank, is advising its clients to put more of their money into US, Japanese and Arabian Gulf equities and bonds as the quality of corporate earnings is superior to those coming out of Europe and emerging markets.

Despite a number of investor concerns, including continued monetary stimulus paring by the US Federal Reserve, worsening ties between Moscow and the West over the Russian president Vladimir Putin’s incursion into Crimea, and strains in China’s financial system, the bank said it expects that its target markets will continue to outperform this year.

“What makes us confident of continued outperformance in our preferred markets is the fact that equity and bond markets in these regions have maintained their optimistic tone in spite of the growing risks to the global economic outlook,” said Arjuna Mahendran, the chief investment officer at Emirates NBD Wealth Management. “This optimism is predicated on continued strength in the growth of underlying earnings of listed corporations in our preferred markets.”

The MSCI World Index, which excludes emerging market stocks, has advanced 22 per cent this year after gaining 24 per cent last year. By contrast, the MSCI Emerging Markets Index, which will include shares from the UAE and Qatar next month, has advanced 5 per cent this year after losing 4.2 per cent last year. Earnings per share in developed markets are expected to grow 11.6 per cent this year versus 4.2 per cent in emerging markets, according Emirates NBD.

Mr Mahendran said that the Fed’s tapering of its US$55 billion monthly money printing programme would do no favours to emerging market shares, an asset class that will also continue to feel the pinch from China’s deliberate economic slowdown.

“An important angle on global economic and market developments is the subsidising growth momentum from emerging markets relative to their previous rates of growth in recent years,” he said. “A major factor in this slowing momentum has been the China banking issues compounded by the anti-corruption purge in the Chinese government, which is affecting spending in the state run economy.”

Elsewhere, Emirates NBD remains bullish about the Gulf region even after rallies in most countries. Dubai’s benchmark index more than doubled last year and has advanced 55 per cent this year, making it the world’s best performer out of 90 stock indexes tracked by Bloomberg.

The bank said investors should focus on earnings and not get too distracted by other issues, such as oil prices.

“The GCC region remains extremely robust despite the ever present threat that oil prices could subside in 2014,” Mr Mahendran said. “This is because all GCC member countries continue to build large external surpluses and have sufficient forex and fiscal reserves to withstand a 10 to 20 per cent correction in oil prices.”

The bank highlighted cement companies in the Gulf region as an interesting investment opportunity, saying they will be beneficiaries of the boom in infrastructure construction by regional governments. More defensive investors were advised to consider buying up telecommunications companies that offer high sustainable dividends amid barriers to entry for foreign competitors.

Follow us on Twitter @Ind_Insights