Last month volatility increased in global markets because of concerns of additional sanctions against Russia and problems in Portugal’s banking system, among other factors. By the end of the month, the CBOE Volatility Index, key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices, was at its highest level since April and bond yields had surged.
However, central bank policies remain an overriding calming factor. Liquidity in the system remains ample and loose monetary policies have helped to keep the equity market’s response to increased geopolitical tensions in check.
Emerging markets continue to recover this year after a difficult 2013. Last month the MSCI EM50 Index was up 2.8 per cent, bringing year-to-date gains to 8.4 per cent. Dubai (up 46.5 per cent), Egypt (up 32.1 per cent) and Qatar (up 29.4 per cent) have been the best-performing markets so far this year.
The divergence between developed and emerging markets’ performance was stark, with developed markets registering a sell-off during the last week of July that erased earlier gains. The MSCI World Index of equities fell 1.6 per cent during the month, while the Barclays Global Aggregate Index of bonds fell close to 1 per cent. On the other hand, emerging market equities gained 2 per cent as sentiment towards China improved.
In July, Middle East and North Africa markets gave positive returns, rebounding from a strong correction in the previous month.
Fundamental valuations in the region remain strong and the correction was used by NBAD Asset Management Group as an opportunity to add to selective blue-chip names. Second-quarter earnings have further validated our conviction on the region and we remain optimistic for the second half of the year.
Regional tensions and the Ukrainian situation need to be monitored but any negative effects are likely to be transitory. On the macro front, Mena GDP growth figures are being revised upwards, corporate guidance remains positive and government policies continue to focus on infrastructure investment.
Second-quarter earnings for most UAE companies were better than or close to expectations, highlighting the underlying health of the economy despite recent market volatility. At the sector level, the real-estate and construction sector recovered strongly last month after a significant correction in June, with the DFM Real Estate Index gaining 27.5 per cent and the Abu Dhabi Real Estate Index rising 22.2 per cent. The heavyweights Emaar Properties and Aldar Properties were up 16.2 per cent and 21.6 per cent respectively, while others such as Union Properties, Deyaar Development and RAK Properties outperformed the heavyweights, gaining 34.2 per cent, 39.2 per cent and 21.7 per cent respectively.
In the construction segment, Arabtec Holding was the main focus as the stock gained 62 per cent last month after dropping 61 per cent in June, bringing its year-to date gains to 107.3 per cent. The UAE real-estate sector has recovered significantly from the 2008 crisis and government policies are now aimed at curbing speculation and ensuring sustainable growth. We believe it is time for selective plays in the sector
Also last month UAE banks rebounded strongly and second-quarter earnings for most of the banks were better than market expectations. Their profitability was driven by decline in provisioning, growth in fee income, which was in turn driven by wider economic growth.
For the banking sector we expect to see continued pressure on the margins going forward, but it will also continue to benefit from the strong continuing economic recovery and pickup in the real estate market.
In the telecoms space, the acquisition of Maroc Telecom is expected to increase Etisalat’s earnings and cash flows. Etisalat also announced a potential bond issuance last month as a part of its global medium-term note programme, mainly to fund its acquisition.
As the summer holidays draw to a close, expect to see stability returning to UAE markets. Valuations are reasonable and as countries in the region look to further relax foreign ownership limits and open up the market for the foreigners, we see significant long-term potential.
Saleem Khokhar is the head of equities at National Bank of Abu Dhabi’s asset management group.
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