Dubai
Clear trends are visible this year with few markets such as DFM, Oman losing its shine due to lack of catalysts as investors are possibly positioning themselves to reallocate funds to Saudi (emerging Index inclusion catalyst) and Egypt (IPO programme of state enterprise to act as a tailwind).
On a YTD (year to date) basis, Egypt (up 13 per cent), Saudi (up 8 per cent), ADX (up 4 per cent), and Kuwait (up 4 per cent), generated better returns so far, while Oman (down 6 per cent) and DFM (down 6.5 per cent) have reversed the gains made last year.
Notable pressure on DFM was on the back of a continuing weakness in DIB (down 13 per cent YTD, we anticipated this, and we remain cautious pre-rights). DIC corrected sharply (down 10 per cent YTD) on the back of weak fourth quarter numbers (rentals remained flat year over year) and as the stock has fully played out the foreign ownership limit event increase in 2017 (from 35 per cent to 49 per cent).
Emaar properties lost 13 per cent since the beginning of the year, as the medium term property market appears challenging given the supply of residential, commercial and retail is on the rise in the UAE.
Although the stock picked up pace post the joint venture announcement with Aldar (Dh30 billion worth of projects), however below-market expected dividends (a special dividend of Dh1 billion in 2017) halted the gains.
All these paved way to a net outflow to the tune of $213 million (Dh782 million) in DFM over the last three months from the foreign investors. ENBD was the only stock to post substantial gains (up 17 per cent) since the announcement of foreign ownership limit increase (from 5 per cent to 20 per cent). We believe there is more steam left in the stock from current levels as we expect the adjusted P/B (Price-To-Book ratio) of ENBD to settle at a 15 per cent premium to the sector multiple (1.3x).
On the other hand, Saudi is seeing hot influx of funds coming in from foreign institutional investors; recently Tadawul saw a record weekly net inflow of 370 million via swaps and QFIs (Qualified Foreign Investors). So far this year Tadawul has received inflow to the tune of $1.5 billion from foreign institutional investors amid renewed focus on potential upgrade to EM (emerging market) status. Excluding — strategic stakes, Al Rajhi ($1.8 billion) continues to be the most-owned stock by foreigners, followed by Samba ($810 million), SABIC ($520 million) and NCB ($484 million).
While we suspect investors will continue to play technical catalysts, we expect to see some weakness in the banking names post FTSE-EM inclusion announcement as the sector prepares for the release of first quarter numbers (late April). Note that the recent SAMA (Saudi Arabian Monetary Agency) sector data points out to sluggish credit demand, especially as private sector growth declined for the 11th consecutive month, the longest we have seen over a decade.
We also note the Saudi banks margins could be under pressure in the first quarteras the benefit of Saudi Arabian Interbank Offered Rate (SAIBOR) increase will filter only for the last month of this quarter.
Net fundamental story (on the banking names) is yet to evolve in Saudi, and hence we could possibly see some choppy sessions during the year.
Egypt’s IPO programme
In Egypt, the big news comes from the planned implementation of $4.55 billion IPO programme of state enterprise, with stake sale of 15 per cent-30 per cent in sectors such as banking, logistics, petroleum over the next 24 months. This is positive for the market, as it will attract more inflows into Egypt and increase market turnover.
Meanwhile, on the economy side, real GDP growth continues to improve (5 per cent in 2017, highest since 2010) and surpass IMF estimates.
Additionally, inflation numbers improved (14.4 per cent in Feb-18 versus the high of 33 per cent in July 2017), and are on track to meet the MPC (monetary policy committee) target of 13 per cent by end 2018. The softening inflation will likely pave way to more rate cuts in the future. While Central Bank of Egypt (CBE) has cut the rates by 100 (basis point) bps in February-2018, consensus anticipates steeper cuts (400 bps in total) for this year.
Going forward, fiscal deficit for Egypt should improve on the back of lower interest rates environment and planned energy subsidy cuts.
All in all, a strong economic recovery should underpin the stock market performance — while lower interest rate environment might not be a good story for banks, it could well be the time to look at highly leveraged names.
