February 2015 Monthly Investment Guide

Transcription

1 February 2015 Monthly Investment Guide 1

2 Table of contents (a) Key Investment Views 3 (b) Economy 4 (c) Equities 5 (d) Fixed Income 6 (e) Alternative Investments 7 (f) Data Gallery 10 2

3 Key Investment Views Economy Developed markets: Growth in the US was at 2.2% in Q while that in the Eurozone stood at 0.7% for the same period. Eurozone witnessed an increase in private lending and corporate activity. Japan clocked a growth of 2.2% in Q Emerging markets: China s economy grew 7.3% in Q4 2014, supported by easing monetary policy and improved industrial activity. India s GDP grew 7.5% in the same period, driven by the strong performance of the services sector. MENA: Growth in the MENA region continued to be supported by the strong performance of the non-oil sector. Social spending and signs of stabilization in oil price also augured well for the region. However, Egypt painted a bleak picture due to contraction in manufacturing and political uncertainty. Outlook: Growth in the US is likely to be driven by increased manufacturing activity, while that in the Eurozone and Japan are expected to receive support from the monetary stimulus of their central banks. Easing monetary conditions and improved fiscal situation would lend support to the emerging market economies. Geopolitical tensions are likely to weigh on select economies in MENA while others will benefit from the strong performance of the non-oil sector. Equities Developed markets: The MSCI World Index rose 5.7% in February. Equities in the US and European markets strengthened, supported by improved economic fundamentals. CAC40 and NASDAQ firmed up 7.5% and 7.1%, respectively. Emerging markets: In February, the Shanghai Composite Index and the SENSEX advanced 3.1% and 0.6%, respectively. Monetary easing and improved fiscal scenario gave a boost to the equities. MENA: The Dow Jones MENA Index closed 3.6% higher, mainly due to an increase in oil prices. All major GCC benchmark indices ended in the green for the month. Dubai recorded the highest gain (+5.2%), followed by Abu Dhabi (+5.1%), Saudi Arabia (+4.9%), Qatar (+4.6%) and Bahrain (+3.5%). On the contrary, Egypt s EGX30 Index slipped 5.2% due to political uncertainty that prevailed in the country. Outlook: Equities in the US and emerging markets are expected to strengthen, due to improved economic activity. The monetary stimulus is likely to give a boost to the Eurozone equities. The stabilization of oil prices and the strong performance of the nonoil sector are likely to drive MENA equities. Fixed Income Alternative Investments Global bonds: In February, the yield on government bonds in- Oil: Crude oil prices rebounded in February with the price of creased in the developed economies of the US, UK, Germany and Brent crude oil rising 18.1% to USD62.58 per barrel, while that of Japan. WTI crude oil increased 3.2% to USD49.76 per barrel. Yields on government bonds in the US and UK slipped due to Natural Gas: Natural gas prices also stepped up 1.6% to USD2.73 higher job creation, improved manufacturing activity and per MMBtu in February mainly due to a rise in space heating signs of stabilization of oil prices. Better-than-expected eco- demand in the US. nomic growth caused yields to decline in Germany, while improved exports weighed on bond yields in Japan. Regional bonds: The CDS spreads in most GCC countries declined Precious metals: Gold prices declined due to weak-global demand and better-than-expected US employment data. Silver prices fell due to lower industrial demand. in February due to indications of a gradual increase in oil prices. Base metals: Copper price rose due to improved manufacturing Based on credit default swaps (CDS) spreads, Egypt contin- activity in China. Aluminum prices slipped due to stagnant de- ues to be perceived as the most risky investment destination mand and capacity additions in China and the Middle East. in the MENA region, followed by Bahrain. Agricultural commodities: Prices of soybean, corn and wheat Currently, Abu Dhabi is the least risky investment destination increased, while that of coffee and sugar declined. in the MENA region. Outlook: Bond yields in the US and the UK are likely to rise due Outlook: Increased demand is likely to push up prices of crude oil and natural gas. Gold prices are likely to fall as improved eco- to improved economic activity. Yields of German and Japanese nomic activity reduces its appeal, while prices of silver and base bonds are likely to slip due to the bond-buying program by their metals are likely to increase due to increased industrial demand. central banks. CDS spreads in MENA would decline in the near Among the soft commodities, prices of soybean and corn are future as oil prices begin to stabilize. likely to rise, while that of sugar and coffee are expected to fall. 3

4 Economy Global Economy Regional Economy Developed markets: MENA markets: The US economy expanded at an annual rate of 2.2% in Q4 In February 2015, the MENA economy witnessed improve- 2014, below analysts expectation of a 2.6% growth, due to ment due to higher oil prices and social spending. weak business stockpiling and larger trade deficit. The Eurozone grew 0.7% in Q4 2014, above analysts expec- Saudi Arabia s non-oil private sector expanded in February due to huge spending on social infrastructure and employee tation, driven by a rise in private lending, improved corpo- bonuses announced by King Salman. Moreover, increased rate activity, and rising consumer confidence. Moreover, export orders and rising employment rate underpinned the growth was supported by a decrease in Germany s unem- growth. The HSBC Saudi Arabia Purchasing Managers Index ployment rate. In addition, Spain s GDP expanded 2% y-o-y (PMI) advanced to a four-month high of 58.5 in February. due to rapid retail sales. Japan s GDP climbed 2.2% in Q4 2014, below the analysts The UAE s economy slowed during the month due to sluggish exports, and falling purchasing activity in the country. The expectation, due to slower consumer and business spending, headline HSBC UAE PMI dropped to a five-month low of 58.1 despite a 2.7% rise in exports. in February. Emerging markets: Egypt s economy witnessed a slowdown in February as busi- China s GDP grew 7.3% in Q4 2014, beating analysts expectation of a 7.2% rise, supported by easing monetary policies and improved industrial activity. However, it was the weakest growth since Q as property prices declined and local governments struggled with heavy debt burden. India s GDP expanded 7.5% in the period October-December 2014, above analysts expectation, aided by higher govern- ness conditions worsened due to contraction in manufacturing activity and exports. The HSBC Egypt PMI fell to a 17- month low of Moreover, the country experienced the largest fall in payroll numbers during the month. Political conditions in Egypt remain a major determinant for growth, with the key focus being on the elections scheduled in March. ment spending and faster growth in the services sector. US Real GDP growth, seasonally adjusted at annual rates 6% 4% 2% 0% 2.3% 1.6% 2.5% 0.1% 2.7% 1.8% 4.5% 3.5% 4.6% 5.0% 2.2% -2% -4% Q Q Q Q Q Q Q Q Q Q Q Q % Source: US Department of Commerce Outlook: The global economy expanded moderately in Q due to subdued consumer spending. The US economy is expected to be driven by a recovery in oil prices and increased manufacturing activity. The expanding support of Quantitative Easing (QE) and easing tensions in Greece are likely to propel growth in the Eurozone. With rising exports and steady improvement in domestic consumption, economic conditions in Japan are estimated to improve. Easing monetary rates in the emerging markets are anticipated to boost private lending and investments. Continuing geopolitical tensions in Ukraine, Libya, and Iran will add a dose of caution to investor s minds. 4

5 Equities Global Equities MENA Equities The global equity benchmark MSCI World Index recovered in The Dow Jones MENA Index rose 3.6% in February on an in- February to gain 5.7% as accommodative monetary policies and crease in oil prices and indications that the US Federal Reserve rising consumer confidence boosted growth. would be patient in hiking interest rates. US equities strengthened in February amid robust payroll expectations and higher growth in the services sector. Also, In the UAE, DFM rose 5.2% and ADX increased 5.1%, driven by the real estate sector (10.6%). Investment and financial the US GDP grew at an annual rate of 2.2% in Q4 2014, services stocks (10.1%) was the top gainer in DFM. higher-than-expected. NASDAQ surged 7.1%, followed by DJI (5.6%) and S&P (5.5%). European markets recovered in February on approval of Saudi Arabia s benchmark index improved 4.9%, mainly due to an increase in oil prices and optimism regarding the opening of the financial markets to foreign investors. Greece s appeal for a bailout extension. The recovery was further supported by better-than-expected German data on unemployment and consumer confidence. CAC40 advanced 7.5%, while FTSE100 climbed 2.9%. Japan s Nikkei 225 rose 6.4% after the falling yen supported growth in exports, thereby driving corporate earnings. Moreover, the index advanced due to the improvement in Japan s GDP growth in Q (2.2%). In emerging markets, Chinese equities improved, buoyed by the central bank s decision to reduce interest. The Shanghai SE index climbed 3.1%. India s SENSEX rose 0.6% due to optimism ahead of the annual budget. On YTD basis, all indices performed well. At the end of February, CAC 40 was the largest gainer. The MSCI World Index Qatar s benchmark index advanced 4.6% due positive corporate earnings results and strengthened crude oil prices. The industrial sector was the best performer, rising 6.3%. Bahrain s benchmark index surged 3.5% as the bourse s reform initiatives were formulated and well received by investors. Oman s benchmark index traded almost flat in February. The EGX30 declined 5.2% amid political uncertainty and the postponement of the final verdict on the lawsuit claiming the parliamentary elections law to be unconstitutional. On YTD basis, the Dow Jones MENA Index rose 3.6%. The Saudi Arabian benchmark index recorded the maximum gain (+11.8%), followed by Egypt's EGX 30 (+4.6%). increased 3.7%. Global stock index performance, Feb-15 Regional stock index performance, Feb-15 CAC 40 Nasdaq Nikkei 225 DJI S&P 500 Shanghai SE FTSE 100 Sensex 0.6% 3.1% 2.9% 7.5% 7.1% 6.4% 5.6% 5.5% Dubai Abu Dhabi Saudi Qatar Bahrain Kuwait Oman Egypt -5.2% 0.4% 0.01% 5.2% 5.1% 4.9% 4.6% 3.5% Outlook: Global equities ended in the green in February as consumer confidence improved and monetary reforms accelerated economic growth. We expect the US and emerging markets to perform robustly, supported by improved economic activity. We anticipate continued recovery in the Eurozone and Japan as easing political tensions and increased monetary stimulus boost economic growth. In MENA, strengthening oil prices benefitted the equity markets. Rapid growth in the non-oil sector is expected to remain a sustainable revenue source for the MENA region. We remain optimistic over the MENA markets as various reform initiatives and improved corporate earnings boost are projected to boost growth in the indices. 5

6 Fixed Income Global Bonds Regional Bonds The yield on 10-year government bonds increased in the developed economies of the US, the UK, Germany, and Japan. Improved economic recovery across major developed economies reduced the safe-haven appeal of government bonds. The yield on 10-year US bonds increased 35 bps to 1.99% in February due to improved economic conditions after indications that non-farm payroll employment rose 257,000 in January. This rise in yields, coupled with the expectations of a hike in interest rates, caused investors to shift funds toward other lucrative asset classes. The yields on 10-year UK bonds rose 47 bps to 1.80% in February on indications of robust economic growth in the UK and stabilizing oil prices. Manufacturing activity grew significantly in February due to increased domestic demand. The yield on 10-year German bunds edged up 3 bps to 0.33% in February as Germany s economic growth in 2014 exceeded expectations, thus increasing the prospects of better economic performance in the near future. The yields on 10-year Japanese bonds rose 6 bps to 0.34% in February on indications that the economy rebounded from recession in Q Additionally, the expectations of improved performance from the export sector led to positive investor sentiment, causing bond yields to rise despite the large bond-buying program launched by the Bank of Japan. The performance of five-year credit default swap (CDS) spreads in MENA: CDS spreads declined 31 bps in Bahrain, 25 bps in Dubai, 5 bps each in Qatar and Saudi Arabia, and 2 bps in Abu Dhabi. On the contrary, CDS spreads rose 37 bps in Egypt. CDS spreads fell in most GCC economies as oil prices increased in February. The rise in oil prices led to a marginal increase in investor confidence in the region, reducing the perception of risk in the region. Despite economic reforms initiated by the government, CDS spreads increased in Egypt due to political uncertainty in the country in February. The Supreme Constitutional Court (SCC) postponed its final verdict regarding lawsuits claiming the unconstitutionality of the parliamentary elections law. This decision made the investors anxious. Rising CDS spreads indicate higher political/sovereign risks for a country. In February, Egypt was perceived as the riskiest investment destination in MENA. Based on CDS spreads, Abu Dhabi was the least risky investment destination in the region. 10 Year Government Bond Yields MENA Sovereign 5 Year CDS (bps) 3% 2% Jan-15 Feb Jan-15 Feb-15 1% 0% US UK Germany Japan Egypt Bahrain Dubai Qatar Saudi Abu Dhabi Outlook: We expect yields in the UK and US to decline as strong economic growth in these countries is likely to continue. The ECB is expected to commence its bond buying program in the first half of March. Bond yields in Germany and Japan are likely to fall due to the bond-buying program of the central banks. We believe CDS spreads in MENA would drop in the near future as oil prices begin to stabilize. However, geopolitical uncertainty would continue to weigh on investor confidence. 6

7 Alternative Investments Energy Crude oil prices rebounded in February. Brent crude oil prices surged 18.1% in February to USD62.58 per barrel, while WTI crude oil prices rose 3.2% to USD49.76 per barrel. The spread between the two varieties widened to USD12.82 per barrel. The rise in oil prices was supported by a decline in rig counts in the US and relatively positive US economic data. According to the International Energy Agency (IEA) s monthly oil market report released in February, global oil supply fell 235,000 barrels per day (bpd) to 94.1 million bpd in January due to lower OPEC and non-opec production. In its monthly report, the US Energy Information Administration (EIA) indicated that US crude oil inventories were at million barrels (about 28.1 days of supply) as on February 20, up 14.4% from the previous month. Natural gas prices gained 1.6% to USD2.73 per MMBtu in February, mainly due to increased space heating demand in the US. The residential consumption of natural gas rose as the eastern parts of the US recorded the lowest temperatures during the month and witnessed snowfall. The latest EIA report indicates that working inventory of natural gas declined to 1,938 billion cubic feet (bcf) in February 20 compared with 2,428 bcf on January 30. Metals Precious metal prices fell in February. Gold prices declined 5.5% to USD1,213.2 per ounce, while silver prices contracted 3.7% to USD16.6 per ounce. Gold prices decreased on weak global demand and betterthan-expected US employment data. Additionally, investors shifted from gold towards equities on expectations of settlement being reached between Greece and its creditors. Silver prices declined in February to USD16.6 from USD17.25 per ounce due to falling demand from industrial units and coin makers. The gold/silver ratio decreased to 73.1 in February from 74.4 in January. Base metals prices were mixed in February. Copper prices improved 7.3% to USD5,895.0 per ton, whereas aluminum prices declined 2.3% to USD1,809.3 per ton. Copper prices increased due to improvement in China s manufacturing activity. China s flash manufacturing PMI index increased to a four-month high in February, indicating growth in factory activity. Moreover, rising crude oil prices supported the price increase. Aluminum prices fell in February due to stagnant demand as well as capacity additions in China and the Middle East. Commodity price performance, Feb-15 Commodity price performance, Year to Date Brent Crude Oil 18.1% Brent Crude Oil 9.2% Copper 7.3% Silver 5.7% WTI Crude Oil 3.2% Gold 2.4% Natural Gas 1.6% Aluminum -1.3% Aluminum -2.3% Natural Gas -5.4% Silver -3.7% Copper -6.4% Gold -5.5% WTI Crude Oil -6.6% Outlook: Crude oil prices rose in February due to a decline in overall production and improvement in global economic activity. We anticipate oil prices to continue to increase on rising global demand and reduction in capital expenditure for crude oil production. Natural gas prices are likely to improve on increased residential demand and demand from new industrial projects. Gold prices are likely to fall as improved economy activity in the developed world reduces the safe-haven appeal of gold. Silver prices are expected to improve propelled by demand from industrial applications. An improvement in China s economic activity is expected to drive the demand for base metals, leading to gains in copper and aluminum. 7

8 Alternative Investments (cont.) Agri. Commodities Agricultural commodity prices were mixed in February. Soybean, corn, and wheat prices rose, whereas coffee and sugar prices declined. Soybean prices increased 7.3% to 1, cents per bushel in February due to low expected yield for the upcoming season and the forecast of an increase in consumption. For 2015, the US Department of Agriculture (USDA) projected a total harvested area of 82.6 million acres, down 500,000 acres from The average soybean yield per hectare is estimated at 46 bushels per acre, 1.8 bushels lower than the record yield of Additionally, the consumption of soybean is expected to increase due to improved exports. Corn prices advanced 3.9% in February to cents per bushel due to lower expected output for the upcoming season. The USDA has forecast a total corn harvested area of 81.5 million acres for the new season, down 2% from The average corn yield is estimated to decline 4.2 bushels to bushels per acre in Furthermore, the consumption of corn is expected to remain unchanged from an earlier estimate of billion bushels. Wheat prices rose 2.9% in February to cents per bushel, largely due to unfavorable weather conditions in the US. The extreme cold winter in some areas and shortage of soil moisture led to a decrease in the 2014 hard red winter (HRW) wheat crop condition and production potential. The concerns of reduced overall production in the US have resulted in an increase in prices. Sugar prices slipped 8.4% in February to cents per pound as rains in Brazil increased expectations of a robust crop in the upcoming season. In addition, the weakening of the Brazilian real to the lowest level in a decade against the US dollar exerted downward pressure on sugar prices. Moreover, India, a major sugar producer, announced subsidies for sugar exports, which is likely to boost global supply. Coffee prices plunged 15.5% to cents per pound as rains in Brazil improved crop prospects for the new season. According to Volcafe, a global coffee merchant, Brazil s coffee output is expected to increase to 49.5 million bags in 2015, up from 47 million bags in In addition, the weak Brazilian real has weighed on coffee prices. Commodity price performance, Feb-15 Commodity price performance, Year to Date Soybean 7.3% Soybean 1.1% Corn 3.9% Corn -3.1% Wheat 2.9% Sugar -5.2% Sugar -8.4% Wheat -12.3% Coffee -15.5% Coffee -17.9% Outlook: We expect soybean and corn prices to rise in the near future due to a projected decrease in harvested area and an increase in consumption. Sugar and coffee prices are estimated to decline in the medium term due to improved weather conditions in Brazil and higher output from other countries, leading to an increase in global supply. We would refrain from taking a view on wheat prices as they are likely to be determined by weather conditions in the US and geopolitical tensions in Ukraine. 8

9 Alternative Investments (cont.) Art The art market gathered momentum in February. The Skate s Art Stock Index rose 3.0% in February compared with a 0.4% decline in January. The market capitalization of eight firms rose in February, whereas that of three firms declined. The benchmark index was up 2.6% YTD. Among gainers, the market capitalization of Seoul Auctions increased the most (27.4%), followed by Art & Business Magazine (20.4%) and Shinwa Art Auction (7.6%). Among losers, the market capitalization of Stanley Gibbons fell the most (-4.5%). The market capitalization of Sotheby s, the largest firm, increased 3.3%. The firm reported a substantial rise in auction sales in February, posting total auction revenues of USD554 million compared with USD101 million in January. For Sotheby s, revenues from the UK accounted for about 98% of the total auction sales in February, followed by North America and Continental Europe. The firm did not report any auction sales in Asia during February. In terms of category, Impressionist and Modern Art, and Contemporary Art accounted for the highest share in the total auction revenues in February. Sotheby s acquired 25% stake in RM Auctions. Founded in 1976, Canada-based RM Auctions is an auctioneer of collectible automobiles. The firm also provides services such as estate planning and financial services. Sotheby s interest in RM Auctions stemmed from the fact that the market for finest automobiles, valued at USD2 billion, continues to expand and is expected to provide new opportunities for both auction firms. For this report, the Skate s Art Stock Index is assumed to comprise 11 companies specializing in art brokerage/ dealership and conducting auction sales globally. Skate s Art Stock Index, m-o-m 8% 4% 4.1% 2.4% 4.7% 3.9% 4.6% 3.0% 0% -0.4% -4% -0.8% -0.9% -3.7% -8% -5.9% -7.0% -12% -9.7% -16% Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Source: Beautiful Asset Advisors LLC, Al Masah Capital Research Outlook: The art market s performance improved in February. However, based on the historical trend, we expect the art market activity to slow down in March. The art market confidence index rose from 22.2 to 32.1 in February. 9

10 Data Gallery Global Equities Index/Country 28 Feb Jan Dec 2014 M-o-M Y-T-D Sensex 29, , , % 6.8% FTSE 100 6, , , % 5.8% Shanghai SE 3, , , % 2.3% S&P 500 2, , , % 2.2% DJI 18, , , % 1.7% Nikkei , , , % 7.7% NASDAQ 4, , , % 4.8% CAC 40 4, , , % 15.9% Regional Equities Index/Country 28 Feb Jan Dec 2014 M-o-M Y-T-D Egypt 9, , , % 4.6% Oman 6, , , % 3.4% Kuwait 6, , , % 1.0% Bahrain 1, , , % 3.4% Qatar 12, , , % 1.3% Saudi 9, , , % 11.8% Abu Dhabi 4, , , % 3.5% Dubai 3, , , % 2.4% Fixed Income Bond Type 28 Feb Jan Dec 2014 M-o-M Y-T-D 10-Year German Bund (%) 0.33% 0.30% 0.54% 0.03% -0.21% 10-Year Japan Govt. Bond (%) 0.34% 0.28% 0.33% 0.06% 0.01% 10-Year US Treasury (%) 1.99% 1.64% 2.17% 0.35% -0.18% 10-Year UK Gilt (%) 1.80% 1.33% 1.76% 0.47% 0.04% 5-Year CDS Bahrain (bps) Year CDS Dubai (bps) Year CDS Qatar (bps) Year CDS Saudi Arabia (bps) Year CDS Abu Dhabi (bps) Year CDS Egypt (bps)

11 Data Gallery (cont.) Alternative Investments Commodities 28 Feb Jan Dec 2014 M-o-M Y-T-D Coffee (cents per lb) % -17.9% Sugar (cents per lb) % -5.2% Gold (US$ per oz.) 1, , , % 2.4% Silver (US$ per oz.) % 5.7% Aluminum (US$ per ton) 1, , , % -1.3% Natural Gas (US$ per MMBtu) % -5.4% Wheat (cents per bushel) % -12.3% WTI Crude Oil (US$ per barrel) % -6.6% Corn (cents per bushel) % -3.1% Soybean (cents per bushel) 1, , % 1.1% Copper (US$ per ton) 5, , , % -6.4% Brent Crude Oil (US$ per barrel) % 9.2% 11

12 Al Masah Capital Management Limited Level 9, Suite 906 & 907 ETA Star - Liberty House Dubai International Financial Centre Dubai-UAE P.O. Box Tel: Fax: Research@almasahcapital.com Website : Disclaimer: This report is prepared by Al Masah capital Management Limited ( AMCML ). AMCML is a company incorporated under the DIFC Companies Law and is regulated by the Dubai Financial Services Authority ( DFSA ). The information contained in this report does not constitute an offer to sell securities or the solicitation of an offer to buy, or recommendation for investment in, any securities in any jurisdiction. The information in this report is not intended as financial advice and is only intended for professionals with appropriate investment knowledge and ones that AMCML is satisfied meet the regulatory criteria to be classified as a Professional Client as defined under the Rules & Regulations of the appropriate financial authority. Moreover, no ne of the report is intended as a prospectus within the meaning of the applicable laws of any jurisdiction and none of the report is directed to any person in any country in which the distribution of such report is unlawful. This report provides general information only. The information and opinions in the report constitute a judgment as at the date indicated and are subject to change without notice. The information may therefore not be accurate or current. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable in good faith, but no representation or warranty, express, or implied, is made by AMCML, as to their accuracy, completeness or correctness and AMCML does also not warrant that the information is up to date. Moreover, you should be aware of the fact that investments in undertakings, securities or other financial instruments involve risks. Past results do not guarantee future performance. We accept no liability for any loss arising from the use of material presented in this report. This document has not been reviewed by, approved by or filed with the DFSA. This report or any portion hereof may not be reprinted, sold or redistributed without our prior written consent. Copyright 2015 Al Masah Capital Management Limited 12