Global equity markets started the year on a positive note and market momentum built following Donald Trump’s victory in the US election remains intact.
Regional markets in conjunction with global markets rose, with the S&P Pan Arab Mena index up by 1 per cent in January. Investors eagerly await clarity on and implementation of Mr Trump’s pro-growth and tax reform policies to be able to assess how far from rhetoric actual polices will be.
Meanwhile, market valuations have already moved higher with the S&P500 trading at 21 times earnings (against five-year average of 18 times) on higher growth expectations.
The oil price is down by 3 per cent in the year to date, with Brent trading close to US$56 per barrel. In January, the recorded US rig count rose by 41 to 566 – a steady upward trend since the oil price began to rebound from its year-ago low.
US oil inventory remains stable, moving up slightly to 494 million barrels from 480 million barrels. The implementation of Opec production cuts remains key and recent positive announcements by a number of GCC countries on output cuts has created confidence in Opec’s agreement and resolve.
For regional markets, the earnings season remains in full swing, with 100 out of 184 companies having reported their numbers (overall earnings show a negative surprise of 2.3 per cent).
Across the Saudi Arabian banking sector, the loan book declined as the government cleared overdue payments with a resultant decrease in financing of working capital requirements. The Saudi liquidity situation has also improved, with loans-to-deposit ratio declining across the board. Net interest margin trended lower as improved liquidity in the banking system was offset by lower Saudi Interbank Offered Rate.
The Saudi petrochemical sector continued to deliver solid quarterly results, but fourth-quarter numbers could not surprise the market on the upside. Operating margins were subject to a small decline across the board on a sequential basis as companies were unable to fully pass through the surge in feedstock cost to end product pricing. Industry barometer Sabic reported a 12.8 per cent decline in fourth-quarter net profit to 4.55 billion Saudi riyals compared with the third quarter, which was broadly in line with market expectation.
The telecoms sector in Saudi Arabia reported a mixed set of results, with both Mobily and Saudi Telecom reporting a decline in revenues because of the continuing SIM card registration issues. Mobily reported a net loss of 71 million riyals in fourth quarter following a 17 per cent year-on-year decline in revenue, on the other hand Zain KSA reported a 54 per cent annual decline in net loss supported by lower impairment charges resulting from an extended licence period and a 7.7 per cent annual growth in revenue.
In the UAE, most banks have reported their fourth-quarter numbers. Loan growth has been sluggish with the exception of DIB, however, deposit growth generally improved especially at Abu Dhabi-based banks. Margins remain tight despite improvement in liquidity and Dubai-based banks continue to benefit from recoveries leading to lower provisioning.
Overall earnings of UAE banks were in line with expectation with no major negative surprises. Going forward, we expect the overall environment improve in the banking sector on the back of relatively stable oil prices and an expectation of mid-single digit credit growth.
In 2016, premium developers in the UAE recorded strong off-plan sales that were supported by flexible payment plans and aggressive product launches. Although earnings visibility for developers remains high given their order backlog, it is imperative to continue sales momentum through the launch of new projects.
As we approach dividend season our positions are skewed towards UAE and Qatar as most companies in these countries pay annual dividends. Many companies in the UAE are trading at an attractive dividend yield of more than 5 per cent. We remain positive on the UAE market because of its relatively diversified economic base. Kuwait continues to rally on expectation that country weight will increase in the MSCI Frontier Index and because of a number of specific catalysts.
In summary, a reasonable start to the year with Mena markets performing well. The results season for regional market remains mixed, while the global backdrop for equity markets remains positive.
Saleem Khokhar is the head of fund management at National Bank of Abu Dhabi.
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