Market-watchers eagerly awaiting MSCI’s decision on Saudi market’s inclusion into emerging market index this month
Most stock markets in the Middle East region traded lower in May, amid thin volumes during the holy month of Ramadan.
Volatility in oil prices and geopolitical tensions were the main drags on the indices.
Oil prices were trading at three and-a-half-year highs in May, after the United States President Donald Trump said that the U.S. would withdraw from the Iran nuclear deal, triggering a re-imposition of sanctions and the effective removal of Iranian supplies for most major economies.
Later in the month, however, indications that Saudi Arabia and Russia might increase oil output to counter potential supply shortfalls weighed on prices.
Trade tensions between China and the United states also hit stock markets across the globe in May, as U.S President Donald Trump proposed tariffs on more Chinese products.
Egypt witnesses sharp pull-back
The Egyptian stock market was the worst performer during the month of May among its peers in the region. The blue-chip EGX30 index fell 10.28 percent, mainly on higher inflation data and weak global markets.
Core inflation increased marginally to 11.62 percent year-on-year in April, from 11.59 percent in March, the first rise in eight months.
According to a Reuters poll of 13 leading regional fund managers conducted at the end of May, participants are still positive on Egyptian equities despite the recent pull-back, with 38 percent expecting to raise Egyptian equity allocations and 8 percent to reduce them.
All eyes in Saudi on MSCI
The Saudi stock market retreated at a slower rate than its pears in the region during May, dropping 0.58 percent, as volatility in oil prices weighed on the Kingdom’s index.
Investors have high hopes that MSCI will upgrade Saudi Arabia to emerging market status this month, which could attract billions of dollars of passive funds to the Kingdom.
“Saudi Arabia is the buzzword of the region as a slew of path-breaking reforms have helped it catch the attention of global analysts. The latest initiative was Nasdaq Dubai announcement to offer Saudi Arabian equity futures and this is certainly a big milestone in the development of Middle Eastern equity markets,” Valecha said.
“The expected inclusion of Saudi Arabia in FTSE and MSCI indices is likely to attract $15 billion to $45 billion in next few years to the region’s equities. Such huge fund flows will create requirements for risk management and Saudi equity futures in Nasdaq Dubai can fulfil this need,” He added.
According to the Reuters poll of 13 leading regional fund managers, 38 percent of participants expect to raise equity allocations in Saudi Arabia and 15 percent to reduce them. That compares to 38 percent and 8 percent respectively in the previous poll.
“Investors’ optimism in Saudi banks’ stocks is linked to potential emerging market upgrade of Saudi Arabia by MSCI,” Malik Shabbir of EFG Hermes told Zawya by email.
He said the first three months of 2018 had been “a good quarter for Saudi banks, with decent earnings growth driven by wider spreads and lower provisioning”.
“The early signs for 2Q18 are encouraging,” he added. “Data for April shows that loan growth has picked up, net profit is higher, and investment growth remains strong.”
Investors more positive on UAE
Dubai’s index dropped 3.32 percent in May, while Abu Dhabi’s index retreated 1.38 percent.
At the end of May, the UAE government announced that it will permit 100 percent foreign ownership of some onshore UAE-based firms, up from the current 49 percent limit (although freezones allow for 100 percent ownership of offshore firms). It also announced that it would grant long-term residency visas of up to 10 years to foreign investors and some professionals, such as doctors and engineers.
The Reuters poll showed that Middle East fund managers have turned very positive on equities in the United Arab Emirates.
According to the poll results, 54 percent of managers now expect to raise their allocations to UAE equities in the next three months and none plan to reduce allocations – the most positive balance since January 2017. In the previous poll, 31 percent expected to raise UAE allocations and the same ratio intended to reduce them.
Marie Salem, director of capital markets at FFA Dubai, said: “We have seen a new movement in the markets throughout May, backed by the new rules announced with regards to the residency in the UAE.”
“News remain(s) positive across companies in the UAE,” Salem said in comments provided via the Eikon Messenger service. “Dana Gas has reached an agreement with the debtholders, Dubai Islamic Bank finalising the capital increase and Emaar opening the Address Downtown. Given all the positivity in the markets, we expect to see some decent volumes going forward,” Salem said.
“On another note, news from Abu Dhabi that Mubadala and ADIC (Abu Dhabi Investment Council) will join up is attracting new liquidity into the market,” she added.
She said that the announcement stated that plans included a change in ADIC’s structure from a private to a shareholding company, adding that this “could imply future targets of listing the entity on the markets”.
Elsewhere in the region, Bahrain’s index outperformed the rest of the stock markets, adding 0.63 percent, while Kuwait’s index dropped 1.32 percent and Qatar’s index fell 2.54 percent. Oman’s main market index dropped by 2.6 percent, bringing its total decline in the year-to-date to 9.7 percent.