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MENAFN - Khaleej Times - 06/04/2014
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(MENAFN - Khaleej Times) Economic growth is forecast to hit five per cent in the uae in 2014 and that will translate in positive surprises in terms of earnings

Gulf cooperation council (gcc) equity markets recorded another buoyant week after a brief period of consolidation: the main benchmarks gained on average more than one per cent with the exception of kuwait which declined slightly.

The dubai financial market (dfm) general index was pushed higher by positive news flow last week. the expectation of better earnings for the first quarter of 2014 in the uae in general also plays a role in boosting investors’ sentiment. economic growth is forecast to hit five per cent in the uae in 2014 and that will translate in positive surprises in terms of earnings.

Common speculation is that markets are likely to move higher until the inclusion of the uae and qatari benchmarks in the msci indices which will happen in may. this makes sense intuitively and is confirmed by data on market breadth. the number of stocks in a bullish trend in the bloomberg gcc 200 index — the largest equity benchmark available — is running quite high at slightly below 80 per cent. historically when the percentage of bullish stocks exceeds 80 per cent the market can be deemed to be overbought and a generalised retreat follows. so both common sense and technical indicators suggest not to pile excessively into gcc markets at current levels and anyway not without an eye to stock selection.

Investors’ sentiment remains quite supportive in the gcc bond markets as well which trade at relatively tight levels due to the strong cash positions and thus the solid fundamentals of companies. the persistent lack of new issuance can be put down to a very competitive loan market where banks aflush with liquidity are eager to finance corporate debt through direct loans at cheaper funding rates.

All of our fixed income high-conviction trade ideas are still intact. on a short-term tactical view we continue to favor dubai sovereigns and uae-based government-related-entities as well as abu dhabi- and dubai-based financials.

Qatar is another gcc market in the spotlight since the qatar has just approved a record 60 billion budget for the fiscal year 2014-2015 in preparation for the 2022 fifa world cup. this is likely to spur economic expansion above the already lofty official numbers: qatar is expected to grow 5.5 per cent in 2014 and 6.1 per cent in 2015 as per consensus. nearly half of the total expenditure will be allocated to infrastructure development and social benefits with 35 per cent of the total allocations to infrastructure projects related to the world cup.

We hold a favourable view on some international markets as well. more specifically the allocation to european equities was recently raised following the announcement by some top bundesbank and ecb officials that there are some non-negligible risks of deflation in the region. this should push the ecb eventually to venture into unconventional monetary policy following in the steps of the us federal reserve. actually the bundesbank president jens weidman — in an announcement which is unprecedented for german high-ranking officials — said that quantitative easing (qe) isn’t out of the question.

Irrespective of qe happening or not — the ecb has often been prone to disappointing investors — the recovery in the euro-area appears so far to be on track as highlighted by leading economic indicator in expansionary territory. these in turn should harbinger positive earnings growth a good piece of news following the two-year recession period which plagued the region since 2011.

European banks are seeing a third round of ‘stress tests’ conducted by their respective central banks and have aggressively been provisioning against bad loans for almost three years now. this means their balance sheets have improved and this puts a floor on banks share prices since further bad news is less probable from loan losses.

In terms of consensus earnings estimates and price targets preferred by the majority of analysts covering euro-area financials out top picks would be societe’ generale axa and allianz.The writer is the chief investment officer. views expressed by him are his own and do not reflect the newspaper’s policy.


Khaleej Times

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