Monthly Newsletter Introduction Capital markets extended their volatile behavior in September into the month of October. The cloud of uncertainty continued to reign on the back of the US fiscal stalemate in terms of budget impasse and debt ceiling debate although other risks have been receding recently. For instance, the US Fed sprung a surprise on markets by keeping its quantitative easing program sailing (USD 85bn in monthly asset purchases) instead of slowing it down (Tapering) as most investors were expecting. We think that the Fed delayed its tapering decision and kept its monetary policy highly accommodative as a precautionary measure to increasing probabilities of fiscal deadlock in Washington. On the other hand, President Obama decided to nominate the pro-stimulus policy candidate, Janet Yellen as the new Chairwoman for the Fed, in a move to re-assure capital markets during the current critical moments and amid “Tapering” concerns. On the geopolitical front, the US and Russia stroke a deal to solve the Syrian chemical weapons crisis. Simultaneously, a season of diplomatic flirting has started between the US and Iran. The two recent developments could be glimmers of hope for a better Middle East; however, we prefer to stay cautious before jumping into rosy conclusions while taking into consideration that what goes unspoken in politics can be more important than what is spoken. On the other hand, more supporting signals were emerging from Europe. Angela Merkel won the German election and the Italian Prime Minister Enrico Letta survived a confidence vote. Economic data releases showed signs of stability and the ECB renewed its pledge to keep money markets in check if needed. While the Fed action to delay its tapering process gave Emerging Economies a lease of life, there are increasing signs that growth prospects of these countries have softened due to tightening in financial conditions coupled with weaker domestic and external demand. In the same context, the Chinese economy continues to deliver a mixed set of data pointing that the rebound might not be solid. Leaders in China are cautioning that stimulus would not help resolve rooted issues in their economy while trying to ensure a 7% growth p.a. over the coming decade. Q3 earnings releases should be currently driving markets around the globe. However, the polarization in the Congress is dominating the scene and is not helping the investment outlook for a durable global economic recovery (a long government shutdown could shave up to 1.4% of Q4 GDP growth in the US). As politicians in Washington take their negotiations to the brink, they are putting the stability of the global financial system on the edge as voiced by the concerns of Japan and China over a possible US default. Simultaneously the IMF warned of the threat of a possible US default while lowering its global growth outlook for 2013 from 3.1% to 2.9% and from 3.8% to 3.6% for 2014. Turning into our investment portfolios, our cash holdings are helping us weather the storm although we started to build some positions in selective stocks. We continue to think that the Fed has only delayed its decision to scale back its simulative bond buying program, and thus the rising tide of liquidity that drove prices up will shrink gradually at a later stage. As such, it is time to be more active in investment approach by focusing on country specific risks and fundamentals, looking for companies with special attributes to form a turnaround story in the portfolio or companies with growing dividend and set to benefit from current circumstances in the economic cycle. For further information and to discuss possible investment opportunities, please contact: Asset Management Dept. Tel: +962 6 5200330 Ext. 494 and 832 [email protected]Monthly Newsletter Asset Management Dept. Asset Management Dept. | Monthly Newsletter “Instability increases uncertainty. It is more difficult to make decisions in an economy that changes sharply than in an economy that changes gradually” -Hyman Minsky Why the US fiscal deadlock is worrying? Global macro …a mixed bag of data releases MENA…A political relief despite continuous turmoil October 9 th , 2013 Asset Management Team: Wassim Jomaa, CFA VP, Head of Asset Management [email protected]Aiat Al Hunaiti AVP, Portfolio Manager [email protected]Sareen Aynedjian Senior Financial Analyst [email protected]Raed Al Momani Senior Financial Analyst [email protected]This report must be read with the disclaimer at the end of the report.
Transcript
Monthly Newsletter
Introduction
Capital markets extended their volatile behavior in September into the month of October. The cloud of uncertainty continued to reign on the back of the US fiscal stalemate in terms of budget impasse and debt ceiling debate although other risks have been receding recently.
For instance, the US Fed sprung a surprise on markets by keeping its quantitative easing program sailing (USD 85bn in monthly asset purchases) instead of slowing it down (Tapering) as most investors were expecting. We think that the Fed delayed its tapering decision and kept its monetary policy highly accommodative as a precautionary measure to increasing probabilities of fiscal deadlock in Washington. On the other hand, President Obama decided to nominate the pro-stimulus policy candidate, Janet Yellen as the new Chairwoman for the Fed, in a move to re-assure capital markets during the current critical moments and amid “Tapering” concerns.
On the geopolitical front, the US and Russia stroke a deal to solve the Syrian chemical weapons crisis. Simultaneously, a season of diplomatic flirting has started between the US and Iran. The two recent developments could be glimmers of hope for a better Middle East; however, we prefer to stay cautious before jumping into rosy conclusions while taking into consideration that what goes unspoken in politics can be more important than what is spoken.
On the other hand, more supporting signals were emerging from Europe. Angela Merkel won the German election and the Italian Prime Minister Enrico Letta survived a confidence vote. Economic data releases showed signs of stability and the ECB renewed its pledge to keep money markets in check if needed.
While the Fed action to delay its tapering process gave Emerging Economies a lease of life, there are increasing signs that growth prospects of these countries have softened due to tightening in financial conditions coupled with weaker domestic and external demand. In the same context, the Chinese economy continues to deliver a mixed set of data pointing that the rebound might not be solid. Leaders in China are cautioning that stimulus would not help resolve rooted issues in their economy while trying to ensure a 7% growth p.a. over the coming decade.
Q3 earnings releases should be currently driving markets around the globe. However, the polarization in the Congress is dominating the scene and is not helping the investment outlook for a durable global economic recovery (a long government shutdown could shave up to 1.4% of Q4 GDP growth in the US). As politicians in Washington take their negotiations to the brink, they are putting the stability of the global financial system on the edge as voiced by the concerns of Japan and China over a possible US default. Simultaneously the IMF warned of the threat of a possible US default while lowering its global growth outlook for 2013 from 3.1% to 2.9% and from 3.8% to 3.6% for 2014.
Turning into our investment portfolios, our cash holdings are helping us weather the storm although we started to build some positions in selective stocks. We continue to think that the Fed has only delayed its decision to scale back its simulative bond buying program, and thus the rising tide of liquidity that drove prices up will shrink gradually at a later stage. As such, it is time to be more active in investment approach by focusing on country specific risks and fundamentals, looking for companies with special attributes to form a turnaround story in the portfolio or companies with growing dividend and set to benefit from current circumstances in the economic cycle.
For further information and to discuss possible investment opportunities, please contact:
“Instability increases uncertainty. It is more difficult to make decisions in an economy that changes sharply than in an economy that changes gradually” -Hyman Minsky
Why the US fiscal deadlock is worrying?
Global macro …a mixed bag of data releases
MENA…A political relief despite continuous turmoil
Why the US fiscal deadlock is worrying? The US fiscal stalemate is having two effects on the US economy and by transition on the global economic performance. For instance, private consumption which is the backbone of the US economy will be affected by the partial government shutdown while business spending and hiring will decelerate as a result of uncertainty. At the level of financial markets, intensified volatility will lead to rising credit and default risks which would translate into a reduced confidence and a cascading effect in the financial system causing a negative feedback loop. Due to the lack of US policy makers’ determination to solve their fiscal issues this uncertainty is becoming an unhealthy recurring matter affecting undesirably the investment outlook. The series of graphs below illustrate in a comparative manner the behavior of the Dow Jones index, the one month T-bill yield and VIX (volatility or Fear Index), currently and in the summer of 2011, when the Congress was debating the debt ceiling issue.
Currently as the debt ceiling tragedy is running, the one month T bill yield (depicted in the graph above) crossed the level reached in the summer of 2011 when the congress was also struggling to reach a deal over the same matter. The rise in this yield indicates increased worries of a possible default which would lead to fading confidence coupled with a series of cracks across the financial system that would start at the level of money markets and repo markets.
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Dow dropped by 16% then recovered in a highly volatile manner
Dow has dropped so far by 6%, we are into the 9th day of the partial government shutdown and 8 days away from a potential default
Congress Debt ceiling battle 2011 Congress Debt ceiling drama 2013 (the show is still running)
Source: Bloomberg, Capital Investments
Monthly Newsletter | Asset Management Dept. 3
October 9th, 2013
On the other hand, as per the graphs below, it is obvious that the price of gold did not reverse its downward trend given the US fiscal stalemate and the delay in “tapering”. This indicates that investors expects liquidity to shrink and yields to rise as the Fed starts withdrawing its stimulus noting that the Bank of Japan and the Bank of England refrained from adding extra monetary stimulus. Concurrently, investors continue to shy away from USD into other hard currencies.
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It is alarming that the borrowing cost for one month is exceeding that of 1 year. This is a big sign of trouble in money markets and showing that investors are pricing in default by the US government. As of Oct 8 , yield on one month T -bill was around 0.3 % while yield on 1 year T-bill was around 0.134%
The VIX index which is a gauge of volatility or investors’ fear in the market is on the rise but did not reach the levels achieved in the summer of 2011, if the fiscal deadlock is not solved soon, investors shall expect more intensification in volatility as such increasing position in the market shall be selective and cautious
Source: Bloomberg, Capital Investments
Source: Bloomberg, Capital Investments
Source: Bloomberg, Capital Investments
Monthly Newsletter | Asset Management Dept. 4
October 9th, 2013
Global macro …a mixed bag of data releases Due to the partial government shutdown in the US, economic data will not be released on a timely basis. While the highly important US unemployment report was the first victim, investors will have to fly blind until the fiscal problem is solved. Anyway the most leading indicators recently released delivered a mixed set of signals. On a positive note, Purchasing Manager Indices for manufacturing and services are printing numbers above the 50 threshold. The figures for PMIs vary from one country to the other but confirm a sluggish growth across the global economy; a fact reinforced by the deterioration in consumer confidence ex- Europe.
* PMI reading above 50 represents expansion of economy.
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5051525354555657585960 US ISM Non-Manufacturing NMI
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HSBC reading for China’s PMI is 50.2 below the flash print of 51.2 for September 2013
Source: Bloomberg, Capital Investments
Monthly Newsletter | Asset Management Dept. 5
October 9th, 2013
Despite sticky unemployment rates across the board, we hope to see that the consolidation taking place at the level of the global economy is gaining further ground. However, we think that markets have been taken hostage since May 2013 by the uncertainty related either to potential Fed tapering or Middle East geopolitical risk or to the US fiscal impasse. Unless this uncertainty fades the power of economic data as a guiding tool for asset allocation is not as significant as it should be because of the instability in its pattern. As a result, investing based on a certain trend in data has lost ground for the identification of investment opportunities based on a bottom up analysis.
MENA…A political relief despite continuous turmoil Albert Einstein once said that “Not everything that can be counted counts; and not everything that counts can be counted”, in this context the avoidance of a US attack on Syria was an inestimable big relief to people and investors in the Middle East and globally. On the other hand, political turmoil and armed clashes still dominates the scene in major Arab countries since the emergence of the “Arab Spring in 2011”. For instance, clashes erupted in Sudan between the government and the opposition on the back of removal of oil subsidies. In Egypt, the picture did not change as skirmishes continue between the Islamic Brotherhood party on the one hand and the Army and a significant part of the Egyptian population on the other. In Syria, the regime seems to be relaxed after the Kerry- Lavrov deal while the opposition parties look to be divided as they are fighting against each other with a noticeable rise of extremists led opposition groups. In Iraq, September was a bloody month as 900 people were killed in various bomb blasts across the country which is increasing impediments to growth in a promising land. In Lebanon, political parties have not agreed yet on unity government, while in Jordan economic reforms are being passed by the government smoothly. Last but not least the Libyan oil is flowing again to markets after a series of supply disruption due to strikes.
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Source: Bloomberg, Capital Investments
Monthly Newsletter | Asset Management Dept. 6
October 9th, 2013
Turning to GCC countries, the story is almost 180 degrees different. In addition to enjoying political stability, they are sheltered with substantial current account surpluses as indicated by the graph below which would help them smooth the effect of potential tapering better than other Emerging Countries.
Looking into specific countries, the UAE in general and Dubai in particular will be waiting early next month for the bidding results related to the Expo 2020. In Qatar, despite the noise surrounding the timing of the 2022 world cup, announcement from Qatar Petroleum about its intention to float some of its subsidiaries on the local stock exchange was the main highlight of the market. As we are heading toward the “Adha” Holiday (pilgrimage holiday for Muslim), companies in the MENA are releasing their results gradually with banks delivering a mixed set of data while petrochemical ex-fertilizer companies seem to have benefited from recent pick up in oil prices and global economic activities. The building material sectors and other consumer related sectors appear to be over stretched in terms of valuation based on earnings released so far. On a separate note, we would like to share some data that could be considered as a proxy for domestic demand in Saudi Arabia. The recent trend of these data releases is a bit alarming and should become irritating if a deeper negative pattern get formed over the coming few months.
In this context, Point of sales data, Cash withdrawals data and figures related to New letters of credit opened at commercial banks for imports are showing a challenging picture in Saudi Arabia. The increase in growth rate of Point of sales data is decelerating, while the Cash withdrawal data scored a negative growth and New letter of credit data registered deterioration in growth for the fourth consecutive month. We might link this huge drop to the summer holiday, Ramadan and Eid Al-Fitr, meanwhile observing the future data would be quite important to determine the direction of the retail purchasing power and thus the earning power of companies affected by domestic consumption. The series of graphs that follows on the next page is a concise illustration of our concerns.
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Source: Bloomberg, IMF, Capital Investments
Monthly Newsletter | Asset Management Dept. 7
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0%10%20%30%40%50%60%70%
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The biggest monthly drop in the growth rate in the last three years,
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New Letters Of Credit Opened Growth Rate YoY
Source: SAMA, Capital Investments
A single digit growth rate
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-58% decline Y-o-Y and the data point to low imports in the future
Announcement of mega –fiscal stimulus of USD 135bn by the King
Announcement of mega –fiscal stimulus of USD 135bn by the King
Monthly Newsletter | Asset Management Dept. 8
October 9th, 2013
Major Indices Status as of end Performance
Dec. 2012 September 2013 September 2013 2013 (1 Jan.-30 Sep.)
MENA
Abu Dhabi 2,630.86 3,842.98 2.90% 46.07%
Bahrain 1,065.61 1,193.93 0.48% 12.04%
Dubai 1,622.53 2,762.50 9.49% 70.26%
Egypt 5,462.42 5,620.53 6.70% 2.89%
Jordan 1,957.60 1,850.59 -1.30% -5.47%
Kuwait 5,934.28 7,766.98 1.76% 30.88%
Lebanon 1,169.14 1,151.80 1.42% -1.48%
Morocco 9,359.19 8,673.49 3.09% -7.33%
Oman 5,760.84 6,646.85 -0.67% 15.38%
Palestine 477.59 468.80 0.00% -1.84%
Qatar 8,358.94 9,608.32 -0.11% 14.95%
Saudi Arabia 6,801.22 7,964.91 2.55% 17.11%
Tunisia 4,579.85 4,462.23 -3.05% -2.57%
S&P Pan Arab Composite 662.36 749.88 2.85% 13.21%
Dow Jones MENA 493.67 558.02 2.72% 13.04%
Americas
Dow Jones Industrial 13,104.14 15,129.67 2.16% 15.46%
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
Monthly Newsletter | Asset Management Dept. 10
October 9th, 2013
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