Markets across the globe have experienced a sharp recovery recently after having started the year on a very negative note.
Investor sentiment had been affected by the steep correction in global markets, concerns over Chinese growth expectations, lower oil prices and uncertainty over United States Federal Reserve policy.
A key question to ask is: what has changed and is this pullback sustainable? We believe that an extreme scenario of a global recession had been priced into valuations, global growth is clearly slowing but not to the degree that valuations had implied. Recent economic data and the flow of news have been skewed towards the positive and policymakers across the US, Europe and emerging markets have moved to calm fragile investor sentiment.
On the macroeconomic front, the US labour market remains strong. During the past two months, an average of 200,000 jobs have been added. The unemployment rate continues to decline, and is now below the 5 per cent mark. Wage growth, which had been missing, is now holding above 2 per cent. US inflation rose to 1.4 per cent moving close to the Fed target of 2 per cent. The Federal Open Market Committee meeting minutes highlighted a dovish stance with a cautious wait-and-see attitude from the Fed.
In Europe expectations are for further monetary easing as growth and inflation remain subdued. In China the central bank governor allayed investor concern on further yuan depreciation. The Chinese economy continues to slow, but at a manageable pace; recent data on money supply, bank loans and broad credit data all came in significantly above market expectations.
The Chinese central bank announced a cut in the reserve requirement ratio by 50 basis points, freeing up an estimated 700 billion yuan in liquidity.
In India, the finance minister announced the 2016-17 budget with a lower fiscal deficit target of 3.5 per cent of GDP as against 3.9 per cent in 2015-16.
Oil prices have also recovered somewhat, although they remain quite volatile. Last month Saudi Arabia, Russia, Qatar and Venezuela decided to freeze oil production at January 2016 levels. The logical second step is to move to production cuts, but this is only likely to happen when major oil producers agree to act together rather than unilaterally.
US oil production declined for the sixth consecutive week from mid-January peak levels, with output now down by 158,000 barrels per day. However, despite lower production US crude oil inventory levels continue to rise. According to the Energy Information Administration, recent inventory levels rose by close to 10 million barrels and stood at 517 million barrels, one of the highest levels in the past 30 years. We expect demand-and-supply equilibrium in the oil market to be reached during the second half of this year.
Mena markets also recovered after the sharp January sell-off and, on a relative basis, are outperforming global markets, with UAE markets moving into positive territory on a year-to-date basis.
Positive catalysts in the Mena region included low valuations, resilient company earnings in line with analyst expectations and a relatively high dividend yield of about 5 per cent as we enter dividend season.
The recent strong performance in Mena markets came despite downgrades by ratings agencies for Saudi Arabia, Oman and Bahrain. In Saudi Arabia structural reforms are being enacted with steps being taken to improve efficiencies and lower subsidies.
In summary, Mena markets have recovered sharply during the past few weeks, driven in part by higher oil prices, low valuations, high dividend yields and a positive global backdrop.
Looking forward, factors to watch include first-quarter results for regional companies, agreement on production freezes or production cuts from major oil producing countries and a stabilisation of global growth expectations.
Saleem Khokhar is the head of fund management at National Bank of Abu Dhabi.
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