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8/12/2019 Capital Investments Asset Management June 5 2014 Monthly Newsletter
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Monthly Newsletter
Introduction
Geopolitics dominated the scene over the past month. Turmoil continued in Ukraine
amid a presidential election and a separation referendum in the eastern part of the
country. Russia (Gazprom) and China (CNPC) signed a USD 400bn historic gas deal albeit
an explosion in the restive Chinese province of XinJiang and skirmish in South China Seabetween Vietnam and China over disputed oil rich water zone. In Thailand martial laws
are in action while through the democratic process of election anti-EU parties claimed
almost 25% of the European parliament seats. Simultaneously, troubled Egypt and Syria
are seeking decisive presidential elections through democratic processes as well. Despite
a hot relation between Iran and GCC countries the love started to spread more equally as
the season of visits to Iran is not restricted to Omani officials as epitomized by the
remarkable visit of Kuwaits Emir to Tehran. As for Qatar whose political tensions with its
GCC neighbors have not cooled yet, is subject again, amid denying wrongdoing, to some
investigations regarding its hosting of the 2022 FIFA World Cup.
Without ruling out the significant repercussions and implications of geopolitical risks; the
investment dilemma between bonds and equities continues to puzzle investors. As stocks
seem to be pricing in a recovery, it may not be logical for the bond market to
simultaneously price in accelerating deflation and deceleration in the global economy.
For instance, the flight to risk against a backdrop of weakening growth albeit in a volatile
manner was justified in our opinion by idiosyncratic factors in the absence of a broad
based market move. In emerging economies as credit default swaps (CDS) levels were
stable; markets were reacting to election optimism in some part (India) and to political
issues in the other (Russia). In the Middle East, the markets of Qatar and UAE were
responding to MSCI index inclusion while in advanced economies, markets moved
sideways in response to data releases without ignoring the pockets of overvaluation in
some sectors.
As for the bond market, there is first a thirst for income around the world in a low
interest rate environment, in addition deflationary pressures are making real yields
attractive while all the economic optimism diffused since the last quarter of 2013 was
not yet confirmed by a hesitant set of data that is neither very good nor very bad to
upset either the bonds or equities investors.
Besides understanding the drivers behind the recent behavior of equities and bonds it is
worth to focus on the big picture and global structural changes in setting asset allocation
as like old time travelers we need to know where is north to set direction.
In this context, asset managers shall be able to maneuver dynamically in a transitory
period that would take them hopefully from liquidity driven to growth driven markets. In
the era of Tapering (monetary policy withdrawal) and in case central banks dont
reverse course we need to see corporate investment in action, increased employment
and a self- sustaining economic momentum that does not require continued stimulus
which is not a high probable scenario in our opinion given the absence of synchronized
growth globally. We believe that liquidity can take you so far but fundamentals should
set the final destination.
For further information and to
discuss possible investment
opportunities, please contact:
Asset Management Dept.
Tel: +962 6 5200330
Ext. 494 and 832
MonthlyNewsletterAssetM
anagementDept.
Asset Management Dept. | Monthly Newsletter
Statistics are no substitute for judgment-Henry Clay
You can measure a man by the opposition it takes to discourage him-Robert C. Savage
Monetary Policy and Macro DataIntersection
Asset Classes a Mixed BehaviorWhich One is Mistaken?
MENAAwaiting Q2 results
June 5t
, 2014
Asset Management Team:
Wassim Jomaa, CFA
VP, Head of Asset [email protected]
Aiat Al Hunaiti
AVP, Portfolio [email protected]
Sareen Aynedjian
Senior Financial [email protected]
Raed Al Momani
Senior Financial [email protected]
Ramzi Mahmoud
Qasem Bilbeisi
This report must be read with the
disclaimer at the end of the
re ort.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]8/12/2019 Capital Investments Asset Management June 5 2014 Monthly Newsletter
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8/12/2019 Capital Investments Asset Management June 5 2014 Monthly Newsletter
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Monthly Newsletter | Asset Management Dept. 3
June 5th
, 2014
It is obvious that mortgage rates came down recently to level seen one year ago only on the back of
decline in US treasury yields as a result the Fed will not disturb in our opinion the recovery in the
housing market as it is considered a cornerstone in the net worth of the US consumer.
Moving to the labor market, while there is an improvement in the jobless rate and jobless claims,
we notice that the number of average weekly working hours was stable over the past year which
means there is still slack in the job market.
4.30
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0 Mortgage Bankers 30 Year Effective Rate, %
33.7
32.9
33.9
34.9
35.9
36.9
37.9
38.9
39.9US Average Working Weekly Hours
All Employees Total Private
6.3
6.0
6.2
6.4
6.6
6.8
7.0
7.2
7.4
7.6 US Unemployment Rate, %
300
290
300
310
320
330
340
350
360
370
380 US Initial Jobless Claims (Thousands)
Source: Bloomberg, Capital Investments
Despite improvement in the labor market the
number of hours worked is moving in a range
channel which means that despite jobs creation
working hours did not increase
Mortgage rates have adjusted upward since the
Fed started to talk about tapering in May 2013and then they drifted downward this year along
with treasury yields.
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Monthly Newsletter | Asset Management Dept. 4
June 5th
, 2014
Moreover coupling the data on housing and employment with the recent drop in consumer
spending and confidence we can get an indication that the outlook is sluggish till now for Q2 2014,
especially if we would like to consider that the GDP contraction of -1% that occurred in Q1 2014 is
attributed solely to weather effect.
Moving to Japan, the Bank of Japan has signaled clearly that it is not increasing its monetary
stimulus despite a fall in retail sales and industrial production as inflation figure soared to 3.4%. The
deceleration in Japan was on the back of the hike in sales tax which took effect in April coupled
with an appreciation of the Yen that affected exporters. We think that the Bank of Japan will keep
monitoring inflation figures before deciding to re-launch a new round of monetary easing to curb
the slowdown.
In the Eurozone, ECBs president Mario Draghi hinted at various occasions that the ECB is
comfortable to act on next meeting on June 5th
as he warns of threat to Eurozone recovery from a
pernicious negative spiral of low inflation. The forex market as epitomized by the Euro behavior is
81.9
71
73
75
77
7981
83
85
87 US University of Michigan Survey of
Consumer Confidence Sentiment
-0.1-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2 US Personal Consumption
Expenditures MoM, %
3.4
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0 Japan CPI YOY, %
-4.4-4.5
-2.5
-0.5
1.5
3.5
5.5
7.5
9.5
11.5
13.5 Japan Retail Sales YOY Change, %
-0.3
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0 Eurozone Industrial Production
MOM Change, %
0.5
0.0
0.2
0.4
0.6
0.81.0
1.2
1.4
1.6
1.8 Eurozone Inflation Rate, %
Source: Bloomberg, Capital Investments
8/12/2019 Capital Investments Asset Management June 5 2014 Monthly Newsletter
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Monthly Newsletter | Asset Management Dept. 5
June 5th
, 2014
already expecting further easing, however if the decision to ease was not beyond the current
expectations of lowering interest rate and easing lending standard to SMEs it may fail to inject
positive shock into markets.
On a separate note we think that the deterioration in the German business confidence is a
reflection of the global rebalancing that is taking place at the moment. We think that as emerging
economies growth led by China is decelerating, exports of capital goods to these markets by
German producers is going to be affected. In the coming years current accounts surplus/deficit to
GDP would be key figures to monitor to understand the world economic transition.
On the other hand, the Chinese economy faced further slowdown in Q2 on the back of deceleration
in industrial output, retail sales and a rise in bad loans for the 10th
straight quarter coupled with a
slowing growth in industrial profits.
While adapting to the new normal in terms of growth pace, the Chinese authorities are taking few
steps to smooth the slowdown and which may give some stimulus to both the local and global
economies over the coming few months.
For instance, the Chinese central bank will cut the reserve rate requirement for few qualified banks
to extend credit to SMEs and instructed the 15 biggest lenders to accelerate the granting of
mortgages to first buyers while monitoring credit risk. At the same time, the Chinese government
allowed some cities and provinces to sell municipal bonds in order to curb the growth in informal
shadow banking industry. The series of graphs presented here indicates that China may move into
a stabilization mode and may pull the world growth over the coming quarters. For instance, the
Yuan recent depreciation coupled with a decline in interest rate and resumption in growth in
1.36
1.27
1.29
1.31
1.33
1.35
1.37
1.39
1.41 EURO Index
33.130
35
40
45
50
55
60
65ZEW Germany Expectation
of Economic Growth
3.4
3.0
3.5
4.0
4.5
5.0
5.5 China Interest Rate Swap (7D Repo) 1yr, %
6.25
6.04
6.09
6.14
6.19
6.24
6.29 Chinese Yuan Spot Vs USD
Source: Bloomberg, Capital Investments
The price of 1 USD in Yuan has
been depreciating since the
beginning of the year
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June 5th
, 2014
money supply in addition to an uptick in manufacturing PMIs are all signals that the Chinese
authorities are putting on some grease to boost the economic engine.
China HSBC manufacturing PMI reading for May is 49.4 up from 48.1 in April, however still under
the threshold of 50 which indicates economy expansion. Simultaneously, the recently released
HSBC service PMI decelerated to 50.7 in May from 51.4 in April. It is worth to note the divergence
between Chinese official PMI data and those of HSBC as the latter reflect the situation at the level
of small and medium sized enterprises and is more representative of the broad economy while the
former (official) is more descriptive of state owned enterprises
The table below illustrates the developments in major PMIs figures around the world and point to a
possible pick-up if the trend continues:
13.2
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0 China Money Supply M2, YoY %
50.8
49
50
51
52 China Manufacturing PMI- Official
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr
Global Manufacturing 50.4 50.6 51.5 51.6 51.9 52.9 52.9 53.0 53.2 52.4 51.9 52.2
US Manufacturing 52.5 54.9 56.3 56.0 56.6 57.0 56.5 51.3 53.2 53.7 54.9 55.4
US Se rvi ce s 53.4 55.9 57.9 54.5 55.1 54.1 53.0 54.0 51.6 53.1 55.2 56.3
US Manuf. New Orders 55.7 59.1 63.6 61.3 61.3 63.4 64.4 51.2 54.5 55.1 55.1 56.9
EU Manufacturing 48.8 50.3 51.4 51.1 51.3 51.6 52.7 54.0 53.2 53.0 53.4 52.2
EU Se rvi ce s 48.3 49.8 50.7 52.2 51.6 51.2 51.0 51.6 52.6 52.2 53.1 53.2
EU Co mp os i te 48.7 50.5 51.5 52.2 51.9 51.7 52.1 52.9 53.3 53.1 54.0 53.5
China Manufacturing 50.1 50.3 51.0 51.1 51.4 51.4 51.0 50.5 50.2 50.3 50.4 50.8
Ch in a Servi ce s 53.9 54.1 53.9 55.4 56.3 56.0 54.6 53.4 55.0 54.5 54.8 55.5
China Manuf. New Orders 50.4 50.6 52.4 52.8 52.5 52.3 52.0 50.9 50.5 50.6 51.2 52.3
Purchasing Managers Indices (PMI) (2013-2014):
* PMI reading above 50 i ndicates economy expansion
Source: Bloomberg, Capital Investments
* Red points displayed within the lines above indicate highest point in the range
* Figures in green indicate acceleration from previous month, while red indi cate deceleration
Source: Bloomberg, Capital Investments
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June 5th
, 2014
Asset Classes a Mixed BehaviorWhich One is Mistaken?
Yields on fixed income in general and on treasury bonds in the US and EU in particular were
following a downward trend on the back of muted economic growth and deflationary pressure.
The divergence in performance between the S&P 500 the Russell 2000 index which is biased
toward small cap companies shows that there is some pockets of overvaluation in the market
coupled with weakness in the economy as we elaborated in the previous section.
The recovery or the pick- up in equities occurred after the 20th
of May on the back of a series of
slightly positive data released coupled with expectation about further easing from the ECB and
amid a statement from President Putin confirming that Russia will acknowledge the results of the
Ukrainian presidential election which eased political tension. Despite all this optimism, expansion
in yields continued to be muted as illustrated by the graphs above.
2.56
2.40
2.45
2.50
2.55
2.60
2.65
2.70
2.752.80
2.85 US Treasury 10 Year Yield, %
1.41
1.29
1.34
1.39
1.44
1.49
1.54
1.59
1.64 Germany 10-yr Govt. Bond Yield, %
1,925
1800
1820
1840
1860
1880
1900
1920
1940 S&P 500 Index
1,129
1,090
1,110
1,130
1,150
1,170
1,190
1,210 Russell 2000 Index
Source: Bloomberg, Capital Investments
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June 5th
, 2014
In GCC the, the strong bull market rally that started since last year got tested several times this year
with the most acute one over the past two months as indicated by the volatile behavior of the
equity markets in UAE and Qatar. The markets in the region were at a tug of war between
fundamentals and liquidity flows on the back of MSCI index inclusion for UAE and Qatar. Wecontinue to believe in the macro story of the region but pockets of overvaluation are undeniable
which explains the recent volatile pattern
Despite low yields and geopolitical risks, the price of gold continued to fall reflecting continuous
deflationary pressure and muted economic growth while the price of iron ore along with other
industrial metal will confirm to investors whether the momentum in the Chinese economy is
gaining ground after the mini-stimulus measures taken early this month and illustrated in the
previous section.
In conclusion, we think that the bond market is offering a better explanation for the investmentand economic outlook along with commodities while equities which are flying on momentum and
liquidity will face reality in terms of macro and micro (earnings) fundamentals to set direction
either through a broad market move or by experiencing the burst of overvaluation pockets as we
witnessed with the Russell 2000 index and other emerging market indices.
5,073
4500
4600
4700
4800
4900
50005100
5200
5300
5400
5500 Dubai Financial Market General Index
13,221
11,800
12,000
12,200
12,400
12,600
12,80013,000
13,200
13,400
13,600
13,800 Qatar Exchange Index
1246
1240
12501260
1270
1280
1290
1300
1310
1320
1330
1340 Gold ($ per Troy Ounce)
92.1
90
95
100
105
110
115
120
125China Import Iron Ore
Spot Price (USD/MT)
Source: Bloomberg, Capital Investments
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Monthly Newsletter | Asset Management Dept. 9
June 5th
, 2014
MENAAwaiting Q2 results
In the MENA region, the election of the army chief Abdel Fatah Al Sisi and of incumbent Bashar Al
Assad as presidents for Egypt and Syria respectively in a relatively peaceful manner along with thevisit of the Kuwaiti Emir to Tehran was the main highlights due to their futuristic implications on
the region. More importantly, in terms of geopolitical indication was the clear support from Saudi
Arabia to Egyptsnewly elected regime politically and economically through a donor conference.
Another important subject was the re-emergence of investigations in relation to potential
corruption case regarding Qatar hosting of the FIFA 2022 World Cup. The uncertainty surrounding
this issue generated a fall in most Qatari equity prices. Due to the high vagueness and tensions of
the subject we are monitoring the situation closely to assess potential risks. In addition, we are
taking into consideration the cases different investment dimensions; on the one hand, momentum
for Qatari equities is going to be impacted either negatively or positively depending on the
outcome of the investigation and on the other we are aware that Qatar has a strong macro
fundamental case beyond the preparation of the world cup event including a healthy publicbalance sheet and an ambitious infrastructure spending program of around USD 200bn to match
the government vision for 2030 in terms of ports, airports facilities in addition to roads and railway
networks not to mention utilities, real estate developments and oil and gas projects. Long term
investors in the Qatari case shall accept bumps in momentum and shall have ability to weather
volatility.
On a separate note, after a strong bull market that was tested several times during this year,
investors in the MENA region are looking for Q2 results to act accordingly. We believe that regional
markets and GCC in particular are trading at rich valuations in general despite the long term
favorable macro picture in terms of infrastructure spending. We have mentioned in our previous
newsletter that due to this situation we opted not to take all GCC markets as one concept and we
focused on bottom up research coupled with investment theme identification.
As such, we are being cautious and dynamic in our investment approach. For instance looking at
Saudi Arabia we are still trying to navigate through the repercussions of the illegal workers crack
down which is still affecting various segments of the economy including, construction, building
material, banking and retail sectors to some extent. In this context, we are trying to identify where
the spending and demand are heading over the short to medium term while focusing on companies
with earning powers and economies of scale and in times of deceleration or shifts the one with
scale and competitive advantage would prevail.
For instance, the banking sector did not experience so far a strong growth in terms of loan volume
while cement sales where following a declining pattern except for selective names, the telecoms
which enjoy healthy free-cash flow have wounded each other with price war over data package
bundles. We opted to include the graphs below which shows the development in point of sale data
and cash withdrawal over the past years to better illustrate the structural shift that is taking place
in the Saudi economy and which necessitate a change in approach toward asset allocation while
taking into consideration the future positive impact of economic reforms on the long run and the
significant liquidity in the system as indicated by the level of oversubscription in IPOs over the short
run.
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June 5th
, 2014
In 2011 the Saudi King launched a stimulus package worth of USD 135 bn including many measures
that aimed at boosting disposable income in the country which explains the shoot up in point of sale
data and the optimism that accompanied it
12%
0%
10%
20%
30%
40%
50%
60%
70%
Jan
April
July
Oct
Jan
April
July
Oct
Jan
April
July
Oct
Jan
April
2011 2012 2013 2014
Point of Sales Y-o-Y58%
7%
25%
12%
0%
10%
20%
30%
40%
50%
60%
70%
2011 2012 2013 2014
April POS Growth Y-o-Y
8%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Jan
A
pril
July
Oct
Jan
A
pril
July
Oct
Jan
A
pril
July
Oct
Jan r
il
2011 2012 2013 2014
Cash Withdrawals Y-o-Y49%
-12%
7% 8%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
2011 2012 2013 2014
April Cash Withdrawals Growth Y-o-Y
Source: SAMA, Capital Investments
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June 5th
, 2014
Major Indices Status as of end Performance
Dec. 2013 May 2014 May 2014 YTD (31 May 2014)
MENA
Abu Dhabi 4,290.30 5,253.41 4.14% 22.45%
Bahrain 1,248.86 1,459.34 2.24% 16.85%
Dubai 3,369.81 5,087.47 0.56% 50.97%
Egypt 6,782.84 8,242.94 -0.16% 21.53%
Jordan 2,065.83 2,130.92 0.32% 3.15%
Kuwait 7,549.52 7,291.09 -1.57% -3.42%
Lebanon 1,150.10 1,220.63 1.31% 6.13%
Morocco 9,114.14 9,494.79 0.24% 4.18%
Oman 6,834.56 6,857.43 1.94% 0.33%
Palestine 541.45 523.07 0.82% -3.39%
Qatar 10,379.59 13,694.19 8.02% 31.93%
Saudi Arabia 8,535.60 9,823.40 2.48% 15.09%
Tunisia 4,381.32 4,537.54 1.11% 3.57%S&P Pan Arab Composite 806.37 936.55 2.76% 16.14%
Dow Jones MENA 598.54 698.59 2.75% 16.72%
Americas
Dow Jones Industrial 16,576.66 16,717.17 0.82% 0.85%
S&P 500 1,848.36 1,923.57 2.10% 4.07%
NASDAQ Composite 4,176.59 4,242.62 3.11% 1.58%
S&P/Toronto Composite 13,621.55 14,604.16 -0.33% 7.21%
Europe
EURO Stoxx 50 3,109.00 3,244.60 1.44% 4.36%
S&P Europe 350 Index 1,338.51 1,408.11 1.88% 5.20%
FTSE 100 Index/ London 6,749.09 6,844.51 0.95% 1.41%
FTSE MIB Index/ Italy 18,967.71 21,629.71 -0.71% 14.03%
DAX Index/ Germany 9,552.16 9,943.27 3.54% 4.09%
ASIA/Pacific
NIKKEI 225/ Japan 16,291.31 14,632.38 2.29% -10.18%
S&P/ASX 200/ Australia 5,352.21 5,492.55 0.06% 2.62%
BRIC
Brazil/ Bovespa 51,507.16 51,239.34 -0.75% -0.52%
Russia/ RTS 1,442.73 1,295.75 12.12% -10.19%
India/ Bombay Sensitive 21,170.68 24,217.34 8.03% 14.39%
China/ Shanghai Composite 2,115.98 2,039.21 0.63% -3.63%
Hong Kong/ Hang Seng 23,306.39 23,081.65 4.28% -0.96%
Source: Bloomberg, Capital Investments
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, 2014
Description Closing Prices as of end Performance
Dec. 2013 May 2014 May 2014 YTD (31 May 2014)
Commodities (in USD)
Brent Spot (Barrel) 110.82 110.66 1.85% -0.14%
WTI Cushing Spot (Barrel) 98.42 102.71 2.98% 4.36%
Natural Gas NYMEX (MMBtu) 4.15 4.54 -6.22% 9.58%
Gold Spot (OZ) 1,205.65 1,249.73 -3.24% 3.66%
Silver Spot (OZ) 19.47 18.82 -2.00% -3.35%
Copper LME Spot (MT) 7,375.75 6,919.00 3.90% -6.19%
Iron Ore 62%F (Metric Tonnes) 134.20 91.80 -12.90% -31.59%
Corn CBOT Active Month (Bushel) 4.37 4.66 -10.26% 6.58%
Wheat CBOT Active Month (Bushel) 6.17 6.27 -13.06% 1.70%
Soybean CBOT Active Month (Bushel) 12.65 14.93 -1.29% 18.09%
Rough Rice CBOT Active Month (per cwt = 100 lb) 15.29 14.99 -3.66% -1.96%
Currencies Spot Exchange Rates Against US Dollar
Euro 1.3743 1.3635 -1.67% -0.79%
GBP 1.6557 1.6755 -0.70% 1.20%
CAD 0.9414 0.9221 1.07% -2.05%
Yen 0.0095 0.0098 0.45% 3.45%
CNY 0.1651 0.1601 0.20% -3.07%
Source: Bloomberg, Capital Investments
600
800
1000
1200
1400
1600
1800
2000
2200
2400
2600 Baltic Dry Index
The Baltic Dry Index tracks worldwide international
shipping prices of various dry bulk cargoes. It
provides an assessment of the price of moving the
major raw materials by sea. Recently showing
demand in emerging markets.
Source: Bloomberg, Capital Investments
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