Markets react positively towards higher oil prices
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Kuwait Finance and Investment Company (KFIC) clarified in its financial report for April; that the global equities rebounded during the month as the MSCI World Index increased by +1.4% as global markets reacted positively towards higher oil prices. In the US, S&P 500 closed flat +0.3% as the US central bank announced that the range of its benchmark interest rate would remain unchanged, highlighting the risks to the domestic economy from shaky financial markets and sluggish global activity. Further justification to maintain interest rates came as the US dollar continued to soften amidst weaker economic data. |
China’s Shanghai Composite ended the month -2.2% lower despite an improvement in business confidence which showed that China’s exports increased the most within a year as declines in imports were shrinking, coupled with an improving manufacturing sentiment. Furthermore, China may have an overall weight of more than 50% of MSCI EM Index with after the potential inclusion of A-Share expected to be announced by MSCI in June.
Eurozone equities were positive, with Germany’s DAX closing +0.7% higher, France’s CAC 40 falling by +1%, and UK’s FTSE 100 rising +1.1%. Germany’s business sentiment unexpectedly fell in April. According to a survey by Germany’s Ifo Institute, companies are less satisfied with their business situation, indicating that a widely expected surge in economic activity at the start of the year will be only short-lived. Japan’s Nikkei 225 dropped -0.6% in April.
Japan’s economic plan has flopped as the yen has continued to strengthen against the dollar, threatening government expectations of stronger economic growth. The finance minister of Japan has reiterated that a lower yen is necessary to “fire up exports and reverse years of weak growth”, with the stronger yen stagnating the economic recovery process.
Commodities witnessed a sharp rally as WTI Crude increased by +15.5% to $45.9/bbl and Brent Crude closed higher by +16.2% at $47.4/bbl. The Doha meeting ended in disappointing circumstances as OPEC and Non OPEC members were unable to agree on an output freeze. The outcome resulted in oil prices falling by as much as -7.0%, but an unexpected labor union strike by Kuwait oil workers resulted in oil prices spiking higher as a result of 60% of Kuwait’s oil production being halted for 3 consecutive days. Silver rallied by +15.6% to close at $17.8/oz due to the prolonged weakness of the US dollar.
GCC Economic Overview:
Saudi Arabia is preparing for the future to diversify away from oil reliance by initiating the world’s largest sovereign wealth fund for the kingdom’s most valuable assets. The 2030 vision, which has been outlined by Prince Mohammed bin Salman, entitled that Aramco would be listed as an IPO by 2018 and the proceeds would go towards PIF. Meanwhile, Standard & Poor’s has kept its main credit rating for Saudi Arabia unchanged at its current level, describing the outlook for the economy as “stable“ with a long-term issuer rating of “A-”. The move follows the announcement of brave austerity measures designed to overhaul the economy.
In the UAE, the IIF has suggested that the UAE economy will sustain strong economic growth in 2016 despite the economic hurdles from the plummet in oil prices. Non-hydrocarbon growth is expected to remain positive at +3.3% as a rise in private growth offsets the decline in public spending. The UAE, and in particular Dubai, is anticipated to benefit from the Iran deal, but the prolonged low oil prices are likely to reduce the impact of the deal on Iranian domestic demand.
In Kuwait, thousands of Kuwait oil workers went on strike to protest against the government plans to reduce wages and benefits. The open-ended strikes reduced oil production in Kuwait by approximately 60% which resulted in a sudden spike in oil prices. Kuwait’s finance minister also stated that the economic reform plan excludes the privatization of oil, education, and health services. Furthermore, Kuwait Bourse is now the sole operator of Kuwait Stock Exchange, which is the first public entity to be privatized as part of the government privatization plan. In Qatar, Doha hosted the oil meeting between OPEC and Non-OPEC members to discuss the potential freeze of oil production.
The credit rating agency Fitch has stated that Qatar continues to show solid economic growth (+4.1% forecast by Fitch in 2016, +3.7% in 2015) with the authorities remaining committed to infrastructure projects, including Qatar Integrated Rail and a significant expansion of the road network which should provide a strong buffer for domestic banks to create opportunities for loan growth. In Oman, two major Omani state-owned oil companies are in negotiations regarding loan facilities worth a combined value of $4.4 bn. The government of Oman has also selected five banks to arrange the first international bond issue in approximately 20 years.
GCC Equities Review:
GCC equities recovered substantially during the month of April as the MSCI GCC IMI index increased by +5.9%. Tadawul index was the top performing regional index, followed by Muscat’s MSM index and Dubai’s DFM index. GCC markets were positively influenced by the rise in oil prices, the announcement from Prince Bin Salman regarding Saudi Arabia’s vision 2030, and earnings resilience in Saudi Arabia.
Tadawul Index climbed +9.4% with many companies displaying stronger than expected earnings. Banks rose sharply by +9.2% mostly due to preliminary results displaying resilient bottom-line performance amidst a tighter liquidity environment, as sector net profit rose by 6.6% YoY and +17% QoQ. Further positive contribution came from Industrials +19.8% and hotels +18.9%. Cements displayed robust earnings which beat most analyst expectations as the sector jumped +4.7%. Petrochemicals reported fairly mixed, but better than anticipated earnings as the sector improved by +14.2%.
DFM Index rose +4.1% with positive contribution coming from Services +14.8% and Real Estate +6.4%. ADSM Index reported gains of +3.5% mostly coming from Energy +13.4%, Banks +4.9% and Services +3.4%.
KSE Weighted Index jumped by +1.8% and KSE Price Index increased by +3.1% mainly due to positive contribution related to Industrials +3.1% and Banks +2.1% as Kuwaiti Banks announced positive results for the first quarter. Oil & Gas performance was overshadowed by the oil worker labor union strike as the sector fell by -7.8%.
QE Index fell by -1.8% with negative performance being linked to weaker than anticipated earnings results. Insurance was the worst performer as it fell -3.0%, followed by Industrials -2.1% and Banks -2%. MSM 30 Index equities rallied +8.7% with positive attribution coming from Banks +11.9% and Industrials +8.2%. BSE index declined -1.8% with negative performance coming from Industries -6.5% and Hotels & Tourism -6.4%.
Sources: Reuters, Zawya, S&P, Moody’s, Bloomberg, The Guardian, CNBC, SAMA.
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