Analysis: Oil’s slide felt in regional equities
Most developed equity markets last month continued to move higher as the confluence of weaker oil prices and expectations of delayed interest rate rises buoyed global growth prospects.
Disinflationary factors remain, particularly in Europe with the European Central Bank president, Mario Draghi, struggling to effect meaningful changes in policy. Notably, the People’s Bank of China cut interest rates for the first time in more than two years, easing credit conditions.
In the United States, the monthly jobs report showed steady growth, with the unemployment rate falling to 5.8 per cent. Oil price weakness was exacerbated by a logical Opec decision not to cut production and allow high marginal-cost producers to share in the responsibility of managing oil exploration and supply to reach a sensible supply-demand equilibrium.
Mena markets were subjected to a challenging period during November and early this month. The sharp decline in oil prices to a four-year low, at levels below US$70 a barrel, dominated investor sentiment as markets declined across the board.
For November, Abu Dhabi declined 3.8 per cent with year-to-date return at 9 per cent; the Dubai Financial Market experienced a similar pattern, declining 5.8 per cent to pare its yearly gain to 27 per cent.
Saudi Arabia lost 14 per cent, bringing its performance so far this year to 1 per cent. Egypt was a notable exception, giving a positive return of 2.1 per cent with year-to-date return at 37.2 per cent.
On a positive note, UAE and Qatar weights were revised higher in the Emerging Markets MSCI Index. We continued to see IPOs that were oversubscribed multiple times and a solid IPO pipeline remains in place for next year.
The dramatic decline in oil prices caused an emotional reaction from regional and international investors on concern of curtailment of future government and infrastructure spending. Although the break-even oil price for some GCC countries is above $90 per barrel, we do not expect an immediate decline in spending, but rather a long-term assessment.
Regional governments have many avenues that can be explored, such as repatriation of foreign assets or running short-term deficits, before cuts are required. Indeed, a recent Moody’s report states that most of the six GCC sovereigns can withstand the pressure resulting from lower oil prices without having to make significant policy adjustments.
The report also noted that the sovereign wealth funds of Kuwait, the UAE, Qatar and Saudi Arabia can cover multiple years’ worth of government expenditures but did raise concern over Bahrain and Oman.
Turning to specific sectors, petrochemicals were hit by the movement in oil prices as naphtha and ethylene prices followed suit, slumping by 12.1 per cent and 17.8 per cent respectively during the month. Average polymer prices were down by between 8 and 13 per cent.
Regional petrochemical companies will benefit, to a degree, from lower feedstock costs, but this is likely to be outweighed by lower polymer prices.
Property prices and rentals in Dubai remain weak owing to concern on oversupply and the impact of tighter regulations and increased levies on property transactions.
The real estate market is in a phase of transformation from being speculative in nature to being driven by underlying fundamentals. In Qatar, Barwa Real Estate continued to perform, supported by the Fifa verdict on Qatar’s right to hold 2022 football World Cup.
Accounting errors hit the Saudi telecom Mobily, and a royalty tax hike from Oman Telecom Authority hit Omantel and Nawras.
The UAE banking sector reported a strong set of third quarter numbers. The aggregate net profit of banks increased by 33 per cent over the same period last year and 5 per cent from the second quarter. Growth in third-quarter profit was primarily driven by decline in loan loss provisioning and strong growth in fee income and was also partially boosted by a number of non-recurring factors.
The Saudi retail banking sector continues to exhibit strong growth. NCB, the largest bank in the region, recently listed on the Tawadul with an overwhelming response from investors.
For a number of Qatari banks, stricter capital requirements are expected to lead to slower growth and may result in lower dividend payouts.
Although oil prices have declined sharply, the financial health of most Mena and GCC economies remains strong with expected GDP growth rates next year of between 4 and 5 per cent. Furthermore, given the recent declines in market valuations the outlook for Mena and GCC equity markets for the year ahead is quite positive.
Saleem Khokhar is the head of equities for the asset management group at NBAD
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Published: December 14, 2014 04:00 AM