March was a mixed month for global risk assets.
Global equity markets diverged in performance while energy, commodities and US Treasuries retreated. The Federal Reserve removed the word “patient” from its statement relating to interest rate policy, but also surprised investors with generally dovish comments.
US economic data has been quite weak as of late, and we believe US Treasury yields are likely to remain low for longer.
The European Central Bank’s bond-buying programme has pushed European sovereign bond yields lower, with a considerable amount of debt offering negative or near-zero yields.
The euro zone economy has maintained its modest recovery. Depreciation of the euro and monetary easing by the ECB has helped to stabilise the region.
Emerging economies as a whole have remained lacklustre in terms of growth. The Chinese economy continues to grow at a stable rate, although momentum has slowed somewhat because of downwards pressure associated with structural reforms.
For the regional markets, volatility increased during the second half of the month, initially on renewed concerns over the falling oil price and then over the escalation of tension in Yemen.
The conflict in Yemen and the response of air strikes from a GCC-led coalition initially caused an aggressive equity market sell-off, especially in Saudi Arabia.
The benchmark Tadawul index was down by almost 5 per cent immediately after the event. However, most markets managed to stabilise and recover in subsequent trading sessions on the belief that the economic effect of the Yemen conflict on regional companies was likely to be limited.
The Mena markets ended last month in the red, with Abu Dhabi down 4.7 per cent, Dubai 9.1 per cent, Saudi Arabia 5.7 per cent, Qatar 5.9 per cent, Kuwait 4.8 per cent, Oman 4.9 per cent and Egypt 2.1 per cent.
At a sector level, the Tadawul petrochemical index slumped 9.8 per cent during the month, underperforming the general index as concerns remain on upcoming first quarter earnings announcements and stretched valuations.
Despite the weaker oil price, petrochemical prices started to rebound last month, led by the ethylene chain, because of extremely tight supply. A series of plants underwent both planned and unplanned shutdowns, and this trend is likely to continue in the second quarter.
The Tadawul real estate index was 2.6 per cent lower as the Saudi government planned to levy a tax on “white land” – totally undeveloped land – which may affect some property companies.
The UAE property sector also remained volatile last month. The DFM Real Estate Index was down 12.5 per cent and the Abu Dhabi Real Estate Index dropped 12 per cent on concerns of elevated prices and sagging demand.
The absence of any new substantial project announcements and lower secondary market transactions also highlight a slowing market.
The property sector in Egypt continued its recent underperformance despite the government focus on developing New Cairo City. The recent listing of Orascom Construction and the upcoming Emaar Misr IPO remain key highlights. Banks in the UAE corrected in line with the general weakness in regional markets, but on lower volumes. They are now generally trading ex-dividend.
Focus has turned to first quarter earnings and we expect mid-single digit loan growth and some margin compression, but on the positive side a decline in provisioning will benefit banks in general and Dubai banks in particular.
The recent correction in the Saudi banking sector provides an attractive entry level, especially for names that are expected to benefit in a rising interest rate environment from a non-interest bearing deposit base. Overall asset quality for GCC banks remains healthy and banks in the region remain well capitalised.
First quarter results are keenly awaited and we expect that the numbers will set a trend for the market.
The opening of the Saudi market will be a closely watched event, with international asset managers keenly awaiting direct access. The long-awaited companies law has finally been passed and will encourage new listings, which will be positive for the depth and breadth of UAE markets.
The recent correction in the region offers selective opportunities, as valuations in many cases are compelling.
Saleem Khokhar is the head of fund management and head of equities at NBAD Global Asset Management
