What to watch in 2014 - a quick view from our portfolio managers [CNEgypt]
(CNEgypt Via Acquire Media NewsEdge)
By Sachin Mohindra & Sherif Salem UAE non-oil economy humming
The non-oil economy will drive growth in 2014, so investor eyes will largely be on Dubai's trade and logistics, tourism, and retail sectors. The last couple of years have shown there is no country quite like the UAE in the region, and no trading hub quite like Dubai. African companies with international ambitions are setting up there, and Indian companies are making the city their second home. The country's airlines are putting in giant aircraft orders, and the major international airports are raising capacity. Winning the bid for Expo 2020 adds extra zest. The only concern is that another bubble may be forming, particularly in real estate, but at least now everyone is talking about this as a concern.
Saudi petrochemicals rebound
In general, 2013 was a disappointing year for Saudi petrochemical companies, with the lacklustre global economy keeping product prices subdued. 2014 promises more, with the U.S. economy and global investment hopefully less encumbered by congressional fiscal wrangling. China, a key market for Saudi petrochemical exports, is already showing signs that inventory is low, and orders should build up ahead of the Chinese New Year, which should help lift prices. With Saudi feedstock prices constant, any pick up in global product prices feeds directly into company earnings.
Egypt on investor radar
The Egyptian market, which had a strong finish to 2013, is starting to attract some foreign investor interest on hopes that political and macro- economic stability may improve in 2014. Supported by billions of dollars in economic aid from the
Gulf, the Egyptian government is embarking on an economic stimulus plan, while parliamentary elections are also expected to be held in the first quarter of the year. Corporate earnings suffered due to curfews imposed following the ouster of President Morsi, but anecdotal evidence suggests that the fourth quarter improved dramatically as the curfews were lifted.
Morocco on the mend
Morocco's macro backdrop is beginning to improve, albeit slowly, and recent fiscal reform and signs of strengthening external demand are starting to encourage investors. Lacklustre eurozone growth is likely to continue to drag on the economy, but Morocco's stock market valuation multiples have bottomed out. The market's reclassification as a member of the MSCI Frontier Market Index (from emerging market) is actually likely to be a net positive. Most actively managed emerging market funds have no or very little exposure to Morocco, but with Morocco set to account for around 5 percent of the MSCI FM Index, the market could well attract significant interest from frontier market investors looking for exposure to markets with a strong demographic backdrop for growth.
Banking on Nigeria
Nigeria's banking stocks, especially the "tier-ones", have lagged consumer stock performance in 2013 because investors have jumped on the most obvious "Africa rising personal income" story. However, valuations for consumer names are now looking very stretched, even with the growth expectations envisaged. It is now hard to disregard the banks that are still trading at or near book value. Loan growth numbers in 2013 were encouraging, but not quite high enough to get investors excited. This year, investors may well rotate into the sector, especially if there is an uptick in loan growth.
Sachin Mohindra is the portfolio manager of Invest AD SICAV - GCC Focus Fund
Sherif Salem is the portfolio manager of the Invest AD SICAV - Emerging Africa Fund
Fourth-quarter earnings results are likely to be the main drivers of performance of the Arabian Gulf markets in the coming weeks, with dividend pay-outs also important given the predominance of retail investors in the region. Investors will also be closely watching the announcement of federal budgets for 2014 for an indication of continued fiscal support to the region's economies, with Saudi Arabia's budget particularly of interest. In December, Qatar announced a few new infrastructure projects, which is an early sign of the likely revival of projects in the country. Meanwhile, in Kuwait, the constitutional court ruled in favour of the validity of the national assembly which means that it will complete its term -- removing one element of political uncertainty hanging over the Kuwait market. Investor sentiment across the region remains robust, with Dubai's successful bid to host the Expo 2020 reinforcing the UAE economic story, even if the benefits from the events for the tourism, trade, retail and real estate sectors will be gradually felt in the coming years. The pace of the U.S. Federal Reserve's "tapering" in the coming year is likely to impact emerging market and frontier market sentiment, but investors in the Gulf are in a cautiously optimistic mode for now.
Investor focus on Egypt will be on the referendum on the constitution that is due to take place on Jan. 14 and 15, and provided that goes smoothly, the market is likely to receive a boost. Many sell-side analysts are already predicting that 2014 will be the Egyptian market's year. Fourth-quarter results from Egyptian companies are mostly due out in February, and could see strong quarter-on- quarter pick up, as business and consumer activity has increased substantially since September, after curfews were firstly eased and then lifted. The Egyptian market's steep rise at the end of 2013 has seen the EGX30 index gain 50 percent from the lows in June, and back to its January 2011 level. In Sub-Saharan Africa, the story of rising incomes remains intact, and Nigeria in particular could well see greater inflows of capital in 2014, as global investors continue to look at larger frontier markets, while reducing exposure to emerging markets, where current account and currency pressures are mounting. However, Kenya is seeing its growth forecasts revised downwards because high interest rates are impacting consumer spending, with the World Bank now predicting GDP growth of 5 percent for 2014, compared to its previous forecast of 6 percent. To maintain the growth momentum, the World Bank is calling for continued investment in infrastructure, elimination of barriers to doing business and implementation of sound monetary policies.
Investors are currently focused on efforts by Iraq's banks to raise capital to fulfil central bank's requirements and on news of the listing of telecoms company Zain Iraq, which is expected towards the end of the first quarter of 2014. Bank of Bagdad is the latest to raise capital, from IQD 175 billion to IQD 250 billion through recapitalisation of retained profits and a rights issue, bringing to 13 the number of banks who have met the central bank's target capitalisation. 8 banks still need to comply, or face penalties, and of these, two have recently held AGMs which will pave the way for capital raisings. The remaining banks represent nearly 20 percent of the banking sector's market capitalisation, and the most notable is Dar Es Salaam Bank, which is majorly owned by HSBC. Meanwhile, against a backdrop of on-going political violence, oil exports continue to disappoint, highlighting the infrastructure constraints and security issues that the country faces. Exports in December are estimated at 2.28 million bpd, down from November's 2.38 million bpd. The government's target was 3.5 million bpd by the end of 2013. However, a new accord between the central government and the Kurdish authorities may now bring an end to years of dispute regarding oil production and exports from the Kurdish region.
Market data as of December 29, 2013
S&P Frontier BMI
S&P Pan Arab
MSCI Emerging Markets
MSCI World Total Return
MSCI EFM Africa Ex S.A.
Total return in local currency (MSCI)
Total return in USD (MSCI)
MSCI South Africa
Middle East credit markets have remained strong in 2013 thanks to positive local news flow, such as Expo 2020 being awarded to the UAE, and slower than anticipated primary market issuance. In 2014, market direction will be primarily driven by moves in U.S. benchmark rates.
The key factors in market direction in 2014 are likely to be the U.S. Federal Reserve's tapering process and the U.S. fiscal situation, and their interrelation with a recovering U.S. economy.
In the last few years, the U.S. Federal Reserve has maintained an aggressive risk management approach to monetary policy in the face of disappointing growth. That continues now, with the Fed keen to differentiate the rate hike cycle from tapering and the end of quantitative easing.
Meanwhile, the weakness in the U.S. economic recovery has been due to an increasing fiscal drag, the eurozone crisis and a relatively weak housing market. Housing market turned in 2012 and the eurozone crisis abated in 2013. In 2014, the fiscal impulse should also turn.
With the Federal Reserve having announced the start of the tapering, reducing its monthly bond purchasing programme by US$ 10 billion, the pace of the tapering now needs to be finely tuned to circumstances. A fast tapering will likely result in pockets of economic and financial weakness, while slower tapering will likely lead to bubbles.
2013 was not a great year for the global economy but it was a great year for many asset classes, with equities generally very strong in both developed and emerging markets.
After years of over-estimating growth in the United States, the Fed and market participants continue to be hopeful that 2014 will usher in the next phase for the economy. With a huge amount of global debt outstanding and the addiction of the global economy to low yields, the Fed will be very careful with tapering. If inflation numbers continue to be soft with emerging market growth still disappointing, tapering is likely to be slow.
Investors will also be looking to the ECB, and in particular whether it needs to implement negative deposit rates or introduce quantitative easing.
One of the key economic trends in 2013 has been falling inflation in the United States, emerging markets and the eurozone area. This has underpinned easy monetary policy and raised the possibility that some countries will flirt with deflation in 2014. To date, inflation has continued to be relatively anchored by stable inflation expectations.
However, with inflation continuing to trend lower and authorities beginning to step back from quantitative easing, there is a chance that inflation expectations may begin to slip which would increase the chances of a deflationary scenario sometime in 2014.
Market data as of December 29, 2013
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