January was eventful for global and regional risk assets.
In developed markets Europe took centre stage as the Swiss National Bank surprised investors by removing the euro-Swiss franc floor, the European Central Bank moved to introduce massive quantitative easing and the Greek election result raised questions about the inclusion of Greece in the euro zone.
In the United States, jobs data remained strong, as did the underlying strength of the economy.
However, inflationary pressures remained absent and company earnings were weak as a strong US dollar took its toll. The IMF now expects the US economy to grow 3.6 per cent this year, up from its forecast of 3.1 per cent in October.
Lower energy prices, more moderate fiscal tightening and a still-loose monetary policy are likely to offset the effect on exports of the strong dollar.
The result was that the S&P 500 Index had its worst monthly performance since January last year, while European equities delivered their best monthly return in nearly four years. Volatility in financial markets resulted in investors moving into US 10-year Treasuries, with yields falling 53 basis points to 1.66 per cent, the biggest monthly decline in over three years.
Within emerging markets, India, the Philippines and Thailand performed well, while Greece, Brazil and Mexico were laggards. The Indian stock market gained 8.1 per cent for the month as the Reserve Bank of India surprised many in cutting benchmark interest rates by 25 basis points.
In the Mena region investors continued to assess the implication of the lower oil price on economic growth and company earnings.
The IMF cut GCC growth estimates by 1 percentage point to 3.4 per cent for this year and urged regional governments to cut spending plans, but highlighted that healthy financial buffers would cushion the effect of budget deficits.
The IMF also stated that the GCC’s oil export earnings are expected to fall by US$300 billion if weakness in the oil price persists. Saudi Arabia, Kuwait and Oman predicted budget deficits for the next fiscal year, whereas Dubai presented a balanced budget.
During the latter part of January the oil price appeared to stabilise, allowing regional investors to focus on company earnings and valuations, which remain attractive on a medium-term view.
In terms of January market performance, Saudi Arabia gained 6.5 per cent, Oman 3.4 per cent and Kuwait 0.6 per cent, while Abu Dhabi fell 1.6 per cent, Dubai dropped 2.6 per cent and Qatar lost 3.1 per cent. Egypt stood out as the best performing market in the region, registering a gain of 10.3 per cent.
In the UAE, the DFM Real Estate Index was down 5.1 per cent, underperforming the DFM Index by 2.6 per cent, while the Abu Dhabi Real Estate Index was down 9.38 per cent, behind the ADX index, which was down 1.6 per cent.
Anecdotal evidence suggests that both selling prices and rentals have softened in reaction to lower economic growth forecasts. The heavyweights Emaar Properties and Aldar fell 7.7 per cent and 10.6 per cent, respectively in January, while shares of Aldar were down 10.6 per cent, and mid to small cap names fared even worse.
In the banking space aggregate net profit of UAE banks increased 26 per cent year on year for 2014.
In summary, a mix of global and regional factors are combining to cause uncertainty in our markets. However, as we enter the dividend season fundamental valuations remain attractive and investors can expect a sustainable income stream in the medium term.
Saleem Khokhar is the head of fund management and head of equities at NBAD Global Asset Management.
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