In October, market volatility increased significantly and across asset classes, risk assets corrected in the first half of the month amid a weakening oil price, concerns over European economic weakness, continued concern on Russia and Ukraine, tensions in the Middle East, Ebola and concerns on US rate raises. However, by month’s end global markets largely recovered as strong third quarter US earnings and dovish statements from Fed officials assuaged market concerns.
With regard to central banks, the European Central Bank disappointed investors by not acting aggressively on unconventional policy measures, the Federal Reserve met expectations by ending quantitative easing, and the Bank of Japan surprised markets on Halloween by boosting its annual target for asset purchases.
Oil price movements deserve a special mention after an 11 per cent drop for the month, registering -16 per cent year to date. Concerns arose on the back of supply demand concerns as US shale oil continues to gain traction and possible political manoeuvring by traditional oil producers to keep marginal cost production in check. US dollar strength during the month also contributed to commodity price weakness.
Concerns over the sharp drop in the oil price prevented Mena markets – which early last month had declined in line with the global sell-off – from recovering strongly by the end of the month.
Among the Mena markets, Abu Dhabi fell 4.8 per cent, Dubai 9.9 per cent,Saudi 7.6 per cent, Qatar 1.7 per cent, Kuwait 3.4 per cent, Oman-6.8 per cent and Egypt 7.1 per cent.
Turning to sector specifics, the UAE banking system continues to show strength supported by strong economic growth, ample liquidity and a decline in loan loss provisioning, with these factors clearly reflected in strong third quarter numbers from the banking sector. Third-quarter earnings were partially boosted by a number of non-recurring events, most notably the Emaar Malls IPO, but the overall increase in earnings was driven by strong growth in fee income with aggregate fee income of UAE banks increasing by 23 per cent year on year. Saudi banks also reported a good set of numbers with aggregate net profit of Saudi banks increasing by 11 per cent year on year.
Qatari banks reported aggregate net profit increasing by 24 per cent year on year. The property sector in the UAE fell heavily last month. The DFM property index was down by 12.6 per cent and the corresponding Abu Dhabi index was down by 17.8 per cent. Concerns remain that the UAE is experiencing a slowdown in this sector. Mitigating factors include less overall leverage in the system and stricter regulations for both developers and buyers.
In Saudi Arabia, the real estate sector was down by 4 per cent as compared to the benchmark Tadawul index, which lost 7.6 per cent.
The Tadawul petrochem index fell 12.9 per cent during the month. An oil collapse is typically a negative indicator for the sector as petrochemical prices generally follow oil derivatives, albeit with a lag, often resulting in declining corporate earnings. Despite market concerns, the third quarter results for the sector were generally in line or above market expectations.
On a fundamental basis most regional companies remain strong. It is during periods of high volatility and consternation that opportunities arise to add to mispriced assets and fundamentally sound positions. In the medium term, expectation is for investor sentiment to remain positive, however, short term market volatility is likely to remain.
Saleem Khokhar is the head of equities, asset management group, NBAD
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