Market analysis: September slowdown across the board

The US GDP growth was revised upwards to 4.6 per cent from 4.2 per cent in the second quarter. David Paul Morris / Bloomberg News

In September, all major asset classes suffered losses.

Equity markets were hit the hardest; the MSCI World Index was down 2.7 per cent and the MSCI Emerging Markets Index tumbled 7.4 per cent. Geopolitical tension in Middle East, political unrest in Hong Kong, continuing tension between Russia and Ukraine and the strengthening of the US dollar were the main reasons for negative market sentiment.

On the positive side, growth in developed markets, particularly in the United States, is showing further improvement. The US GDP growth was revised upwards to 4.6 per cent from 4.2 per cent in the second quarter after recording negative growth of minus 2.1 per cent in the first quarter.

The second quarter growth was strong because of strong household spending on durable goods and higher business spending on new equipment and buildings. US consumer confidence also climbed to a 14-month high in September registering at 84.6 from 82.5.

The performance of markets in the Mena region last month was mixed, with Abu Dhabi and Qatar up 1 per cent, Oman up 1.6 per cent, Egypt up 3.9 per cent and Kuwait up 2.6 per cent, while Saudi Arabia was down 2.3 per cent and Dubai was down 0.4 per cent.

The Saudi market underwent some correction after a strong rally on the back of plans to open the kingdom’s bourse to foreigners next year. Oil prices continued to decline on excess supply and a strengthening US dollar.

The IMF recently lowered its growth forecast for the Mena region but acknowledged that many oil-exporting countries would continue to grow strongly. On a year-to-date basis, the Abu Dhabi Securities Exchange General Index is up 19 per cent and the Dubai Financial Market General Index has risen 50 per cent.

Meanwhile, volatility on the global markets increased on speculation as to the timing of likely US interest rate rises. The euro zone remains weak and its continuing political tensions with Russia over the Ukraine issue will have a significant effect on EU growth. Emerging markets fell 7.6 per cent on a strengthening dollar, expectations of early interest rate hikes in the US and weak economic data from China.

Last month the Emaar Malls Group initial public offering took centre stage. The IPO was 30 times oversubscribed for the institutional tranche and more than 20 times oversubscribed for the individual one. The offer was priced at Dh2.90 per share, at the top end of the price range, and on the first day of trading closed up 12 per cent.

The IPO market in the UAE is now gaining traction and more companies are expected to list, adding further depth and liquidity to the bourses

Coming to the UAE's banking industry, the system remains quite healthy and the retail sector continues to do well. Banks continue to benefit from strong economic growth and ample liquidity. However, retail loan growth may slow slightly in the next year as Al Etihad Credit Bureau exposes borrowers with bad credit history.

Most banks reported strong earnings ahead of market expectations in the second quarter of this year. Their profitability has been driven by a decline in provisioning and growth in fee income. Expectations in the coming quarters are for a slight decline in margins as competitive pressures remain. Last month share prices of ADCB and Dubai Islamic Bank increased 6 and 5 per cent respectively, while share prices of Emirates NBD, FGB and NBAD gained about 2 per cent.

During September the real estate sector was slightly down, with the DFM Real Estate Index and Abu Dhabi Real Estate Index underperforming the broader measures on the two exchanges. There is evidence of a slowdown in the real estate space, particularly in the finished property segment. However, it should be noted that there is less leverage in the system and that the regulatory environment is much stricter for both developers and buyers.

Shares of Dubai Financial Market, the only listed bourse operator in the region, fell 2.9 per cent in September, bringing its year-to-date gains to 36 per cent. The average daily traded value on the DFM was US$314 million during the month. The traded value, however, increased by 40 per cent compared to August.

Apart from Emaar Malls Group, Marka was the other listing during the month and future possible IPOs include Amanat Holding, Al Habtoor Group, Ithmar Capital and Damac, which should create further depth and liquidity in the market.

The telecoms sector performance in the Mena region was muted. We expect consolidation driving the industry, as rising competition has been affecting margins. The Mena petrochemicals sector was weak after the sharp correction in crude oil prices, renewed concern on additional oil supply from the US and a slowdown in global demand.

Our focus on UAE stocks has become more selective, and an increase in volatility is expected as concerns on the geopolitical environment remain and speculation on the timing and effect of US rate rises continue.

Saleem Khokhar is the head of equities at National Bank of Abu Dhabi’s asset management group

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