Market analysis: 2016 will be challenging for Mena

Saleem Khokar of NBAD looks back at the past year and gives insight into what should be expected during the next 12 months.

The direction of the oil price will determine the timing of a re-rating for the Mena markets. Ali Haider / EPA

The year turned out to be challenging for Mena and global markets. Global economic growth and trade slowed down, corporate profits fell, commodity prices corrected further, the US dollar strengthened and uncertainty regarding a possible hike in US interest rate persisted.

Globally, questions were raised around the sustainability of economic growth in the US as the unemployment rate declined and other sets of economic data did not resonate a strong recovery. Thus, we expect a rise in US interest rates to be gradual.

Growth in Japan remains elusive, questioning the country’s Abenomics policies. In Europe, economic growth picked up driven by quantitative easing, however inflation is still missing which is a cause for concern. Asia showed a mixed picture with oil-importing countries benefiting from lower prices resulting in lower inflation and lower interest rates, while commodity-dependent and export-oriented economies suffered.

China, which has been a global growth engine for the last decade, started to show early signs of slowing down. The effect was particularly visible in the commodity market, where most of the commodities corrected by about 20 per cent in dollar terms over the year.

As we step into 2016, the overall economic environment remains challenging.

The IMF has forecast a global economic growth of just under 3 per cent for next year, which we see as reasonable given the current environment.

Mena markets painted a similar picture this year. On the back of a declined oil price, the region’s markets corrected by 17 per cent. Oil continues to play an important role in the region, despite various steps taken by the GCC countries to diversify their economies.

We anticipate that the weakness in the oil price will continue in the near term, given the excess supply of 2.5-3 million barrels per day and oil producers who continue to pump record quantities to gain market share. With oil hovering below US$40 per barrel, marginal oil producers will be forced to lower their production. According to the US Energy Information Administration, US crude output(particularly shale producers) has declined by 500,000 bpd this year.

Next year, it is expected that nearly 1-1.5 million bpd of further oil supply will be curtailed while demand could grow by the same amount and reach equilibrium.

In the meantime, we foresee oil prices might remain subdued for another couple of quarters.

Year 2016 will prove to be challenging for Mena markets. However, we believe the region will grow between 2.5-3 per cent given the current pipeline of projects and the governments’ undeterred strategies to continue spending and commitment to completing these projects.

The low oil price also provided an opportunity to embark on much needed reforms. This year we saw discussions around the introduction of various reforms such as taxes, cuts to subsidies or sale of assets by the government.

Next year, we expect more clarity on the implementation of these reforms, although we foresee this could be a slow and a gradual process. Looking at corporate profitability, we believe a low single-digit growth is more likely for the next year. Among various sectors, we think that the non-cyclical sectors, that is consumer and utility, will do better compared with commodity and financials.

Over the past year-and-a-half, Mena markets corrected sharply and valuations look attractive as the market is trading at the lower end of the last five year’s range. We do not expect fundamental changes in the near term as the direction of the oil price will ultimately determine the timing of a re-rating for the Mena markets. Stability in the oil price will be required to draw a constructive case.

Thus, in the near term, market performance could remain volatile and subdued. However, for medium to long term investors the current market offers an opportunity to generate decent returns.

Saleem Khokhar is the head of fund management at National Bank of Abu Dhabi