Region’s investors see off shaky September

September was another weak month for global equities as concerns remained high about the state of the world economy. These centred on the extent of the slowdown in China, depressed commodity prices, and mixed messages from the US Federal Reserve on the timing of the first hike in base interest rates.

The two best performing MENA markets were Kuwait and Egypt. In Kuwait, authorities forecast a deficit of 7 billion Kuwaiti dinars ($23 billion) in the current fiscal year, a sharp contrast to the budget surpluses recorded in each of the past 16 years. Markets took Kuwait’s worsening fiscal position in their stride, choosing to focus on the huge fiscal reserves the emirate has built up, its heretofore relatively modest spending on infrastructure, and a break even price for its oil exports that is the lowest of any GCC member instead of its budgetary shortfall.

News from Egypt was equally mixed, with the authorities trying to stabilise the Egyptian pound through strict capital controls. The controls have been effective to some extent, with signs of a waning in the black market for dollars and a slowdown in the pound’s slide following a managed devaluation in July.

Oman and Lebanon also did better than the custom S&P Pan Arab Index in September. Lebanon continued to struggle with 1.1 million Syrian refugees, while street protests were mounted in Beirut over uncollected garbage. Lebanon also posted a budget deficit of $1.3 billion in the first seven months of 2015, compared to a surplus of $131 million in the same period last year, according to the central bank.

As for Oman, an agreement was signed during September with Iran to study a sub-sea gas pipeline in a project worth $60 billion. Exports of Iranian gas to Oman are expected to begin in two-and-a-half years. New spending projects topped $11 billion in the first eight months, but this probably reflects a significant backlog, while the value of new projects in the pipeline has dropped.

However, there was some fallout for Qatari stocks after Switzerland launched a criminal probe into Fifa President Sepp Blatter. However, a FTSE Group upgrade of the Qatari equity market from frontier to ‘secondary emerging-market’ status from September 2016 proved a bright spot for investors. Accounting for an estimated 1.2 per cent of the FTSE Emerging Index, Qatar’s inclusion could lead to inflows from FTSE trackers of around $1.1 billion.

Saudi Arabia and the UAE underperformed the custom S&P Pan Arab Index in September. An important reason for the decline in the Saudi market was a decision by the Ministry of Finance to suspend Saudi Binladin Group from new contracts pending legal action. It will also review existing contracts with the construction giant following the mid-month collapse of a crane in Mecca’s Grand Mosque.

However, government officials confirmed that the group will continue to be compensated for existing projects. As another sign of the willingness for pursue reforms in the kingdom, a special body was established to speed up the awarding of construction contracts during September. A further signal of the effort taking place to attract investment and diversify the economy came early in September when it was decided to ease restrictions on foreign investors and let them own 100 per cent of retail and wholesale businesses (from 75 per cent currently).

However, while the long-term effects of such moves may be positive, they had a detrimental impact on local Saudi stocks in the sectors affected by such reforms.

The UAE market’s underperformance reflected some slackening of the real estate market in Dubai amid falling property prices. Government and public sector deposits in the UAE have been declining while borrowings have continued to climb, resulting in a rise in the loan-to-deposit ratio to 95 per cent in July compared to a historic low of 87 per cent in June 2014.

Moving into the final quarter of 2015, sentiment remains dominated by worries over China’s economy and continued uncertainty about the Fed’s interest rate intentions. However, news on both fronts could improve. A modest Fed rate hike — possibly in December — should remove the cloud of uncertainty that has been hanging over emerging-market assets.

While recent months have been relatively rocky for the region, it is too early to become overly concerned about its medium-term prospects. The drop in oil prices has triggered reforms to unsustainable tax and subsidy mechanisms — a pleasing sign of greater budgetary discipline by governments.

— The writer is chief investment officer, Mena Equity, Franklin Templeton Investments (ME) Ltd.