Issuu on Google+

Kuwait Financial Centre “Markaz” RESEARCH

Markets in ‘Risk-Off’ Mode

June 2012

Global Turbulence weighs down GCC markets Research Highlights: Review of global and regional stock markets for the previous month

Markaz Research is available on Bloomberg - Type “MRKZ” <Go> Thomson Research, Reuters Knowledge Nooz Zawya Investor ISI Emerging markets Capital IQ FactSet Research Connect TheMarkets.com

M.R. Raghu CFA, FRM Head of Research +965 2224 8280 rmandagolathur@markaz.com Madhu Soothanan Senior Research Analyst +965 2224 8000 Ext: 4603 MSoothanan@markaz.com

Kuwait Financial Centre S.A.K. “Markaz” P.O. Box 23444, Safat 13095, Kuwait Tel: +965 2224 8000 Fax: +965 2242 5828 markaz.com

S&P 500 -6.05

May 2012 Returns1 (%) MSCI World MSCI EM -8.70 -11.5

S&P GCC -6.14

May 2012 is easily the most eventful month this year. Elections in France, Greece & Egypt, Moody’s downgrade of 26 Italian banks, rumors of bank run & the exit from Euro by Greece, trading fiasco at JP Morgan, the rise & fall of Facebook IPO, cut in reserve ratio by Chinese central bank and Premier’s indications of policy action to support economy, downgrade of Japan’s sovereign rating, VIX increasing 41%, Euro hitting 2 year low versus dollar, precious metals & oil trading near 2012 lows…. The World broad index was down 8.7% in May as investors sold-off equities and flocked to safer assets. Europe, which is the epicenter of crisis, witnessed deep cuts with MSCI Europe losing 12.5% for the month. The flight to safety resulted in 10-year US Treasury yield hitting an all-time low of 1.642%2. Investors clearly pushed the panic button and moved to ‘Risk-Off’ mode with price correction being witnessed in most of the asset classes. ‘Safe haven’ gold too saw a cut of 6%. The winner clearly is the US dollar index which was up 5.4% in May. Euro (6.6%), Brazilian Real (5.7%), Russian Rouble (12.2%), and Indian Rupee (6.5%) suffered major losses against the USD. OECD, in its Economic Outlook report, held its forecast for global growth at 3.4%, but lowered its outlook for the Eurozone to a 0.1% contraction. OECD expects US to grow at 2.4% in 2012 while growth across the OECD countries is projected to slow to 1.6% in 2012 (2011: 1.8%). GCC markets were down in May, losing 6.1% after a decrease of 3.2% in April. Global factors weighed down on GCC with all the markets ending in Red. Dubai was the largest loser shedding 9.8% for the month, followed by Saudi Arabia which lost 7.7%. Saudi has been the best performing market YTD, with a gain of 8.7%. Kuwait lost 2.2% May cutting its yearly gain to 0.71%. Volumes in the GCC decreased by 25% MoM while Value Traded decreased 38% over the month to USD 49bn. This was on the back of 22% MoM drop in volumes and 16% decrease in Value Traded in April. Saudi Arabia, which accounted for 88% of GCC’s total value traded, witnessed a 40% MoM drop in value traded. Risk in the GCC (as measured by the Markaz Volatility Index – MVX) dropped 7% in May, probably because of reduced market activity. Risk in Kuwait was up 42% for the month while MVX Abu Dhabi shed 42%. Valuations dropped in the GCC as markets suffered two consecutive monthly losses. Most countries traded near the 8x-12x range.

1 2

All May Returns are calculated from the 30th of May 2012, closing values http://blogs.wsj.com/marketbeat/2012/05/30/fear-drives-10-year-treasury-yield-to-record-low/


RESEARCH June 2012 Global Markets Review – May 2012

The World broad index was down 8.7% in May as investors sold-off equities and flocked to safer assets

Global markets were negative in May due to worsening conditions in the Euro Zone. The World broad index was down 8.7% as investors sold-off equities and flocked to safer assets. Europe, which is the epicenter of crisis, witnessed deep cuts with MSCI Europe losing 12.5% for the month. Losses were seen across all major equity markets. China (Shanghai Index) stood out with the least monthly loss of 0.5%, after the Chinese central bank cut its reserve ratio and on hopes of government stimulus to recuperate the falling economy. CBOE VIX increased 41% during the month signaling heightened volatility. Commodities too suffered large losses with Crude oil shedding 13.6% due to concerns on demand slowdown and increasing inventories. Gold and silver too saw cuts of 6% and 10% respectively. Figure 1: Monthly Returns – May 2012 (%)

On a YTD basis, Shanghai rules the bunch with a gain of 8.4%

On a YTD basis, Shanghai index rules the bunch with a gain of 8.4% followed by Sensex (India) which is up 5.5% for the year. MSCI Europe suffered the most with a loss of 6.7% in 2012. Figure 2: Price Returns – YTD (%)

Kuwait Financial Centre “Markaz”

2


RESEARCH June 2012 World

Spain’s borrowing costs are nearing levels that prompted bailouts for Greece, Portugal & Ireland

Happenings in Europe clearly dominated the market action in May. It all started with the defeat of Nicolas Sarkozy in French elections. The win by a Socialist candidate has put question marks over the country’s austerity measures. This followed by a failure to form a coalition government in Greece and the announcement for fresh elections in June. Political uncertainty in Greece aggravated discussions about a Greek departure from the Euro. There was also news about large scale deposit withdrawals from Greek banks. The action shifted to Spain late in the month with the country’s fourth biggest lender, Bankia, seeking EUR 19bn in state aid after it was rescued by the government in early May. This lead Spain’s borrowing costs nearing levels that prompted bailouts for Greece, Portugal & Ireland. After the USD 2bn trading loss at JP Morgan rattled markets for a few sessions, US economic data was not encouraging as well. Consumer confidence fell to eight-month low in April while the Manufacturing PMI fell to a three-month low of 53.9 in May, down from 56.0 in April. Pending home sales for April also fell 5.5% on a MoM basis while Jobless claims increased by 10,000 in the week ended May 26. Meanwhile, in Asia, Fitch lowered Japan's long-term foreign currency rating from AA to A+ and cut the local currency rating from AA- to A+. Both were given a negative outlook. China reduced its reserve ratio by 0.5% in order to free-up funds for the banking system. Action by Government was evident from Chinese Premier’s statements on escalation of efforts to support growth.

Chart Pack – Global Markets Figure: 3 – Capital Flows to Emerging Economies

Figure: 5 - US Dollar

Figure: 4 - Feds Fund Target Rate

Figure: 6 -Housing Market Index

Kuwait Financial Centre “Markaz”

3


RESEARCH June 2012 Figure: 7 - US Unemployment (Seasonally Adj)

Figure: 9 - TED Spread

Figure: 8 - Crude Brent Oil Prices

Figure: 10 - CBOE VIX

Figure: 11 - CRB Commodity Index

Kuwait Financial Centre “Markaz”

4


RESEARCH June 2012 GCC Markets Review – May 2012

GCC markets continued its losses in May, losing 6.1%

GCC markets were down in May, losing 6.1% after a decrease of 3.2% in April. Global factors weighed down on GCC with all the markets ending in Red. Dubai was the largest loser shedding 9.8% for the month, followed by Saudi Arabia which lost 7.7%. Saudi has been the best performing market YTD, with a gain of 8.7%. Kuwait lost 2.2% May cutting its yearly gain to 0.71%.

Market Indicators Indicators

M. Cap (USD Bn)

Last Close

Monthly Return %

YTD %

2011%

P/E TTM

Saudi (TASI)

365

6,975

-7.72

8.69

-3.07

12

Kuwait SE WT.INDEX

104

408

-2.15

0.71

-16.89

16

Qatar(Doha SM)

98

8,473

-2.65

-3.49

1.12

9

Abu Dhabi (ADI)

76

2,450

-2.16

1.98

-11.68

7

Dubai (DFMGI)

48

1,471

-9.83

8.66

-17.00

10

Bahrain (BAX)

17

1,137

-1.36

-0.58

-20.15

8

Oman(Muscat SM)

14

5,787

-1.40

1.61

-15.69

12

241

96

-6.14

4.28

-8.47

12

S&P GCC Composite Index

Source: Excerpt from Markaz ‘Daily Morning Brief’ May 31st , 2012

OPEC’s May Oil output has reportedly hit its highest since 2008 as Saudi Arabia maintained high production rates despite falling prices. OPEC’s production averaged 31.8mn bpd, up from 31.75mn bpd in April. Earlier, Saudi Arabia’s Petroleum Minister was quoted as saying that the Kingdom wants an oil price of around USD 100/bl and would like to see inventories rise before demand picks up in the second half of the year.

IMF expects Saudi Arabia to grow by 6% in 2012 with fiscal surplus of 17% of GDP

Saudi Arabia The IMF, after its latest assessment, projects Saudi Arabia to grow by 6% in 2012 with private sector increasing its role in the economy. IMF expects fiscal surplus at 17% of GDP and external surplus at 27% of GDP. Amidst falling crude prices, finance minister announced that Saudi would be able to balance its budget even if oil prices fall to less than $80/bl. Late last month MSCI announced its decision to reintroduce MSCI Saudi Arabia Domestic Indices and also make changes to MSCI GCC Countries & MSCI Arabian Markets Index. The indices will be added on June 26, 2012. Saudi Arabia announced its plans to invest USD 53bn in air transport industry in the next five years. The Kingdom also launched a tender to build a new metro system in Riyadh. Saudi Electricity Co. has signed a USD 1.3bn contract to build a power plant northwest of Riyadh. The 2,175 MW plant is to be built in 36 months. SEC lost 10% for the month. Advanced Petrochemicals Co. signed an MOU with Bayegan Group for development of USD 1bn propane dehydrogenation & polypropylene plant in southern Turkey. The company will hold a 70% stake in the project. Advanced Petrochemicals Co. shed 11.4% in May. Almarai Co. announced a 5-year investment program worth USD 4.2bn to expand in all areas of farming, manufacturing, distribution and logistics. The company gained 2.2% for the month.

Kuwait Financial Centre “Markaz”

5


RESEARCH June 2012

S&P affirmed its 'AA/A-1+' long and short-term foreign and local currency ratings on Kuwait with Stable outlook

United Arab Emirates As per Dubai's Economic Council, Dubai is projected to grow by around 45% in 2012, fuelled by strong performance of trade and non-hydrocarbon sectors. Meanwhile, IMF said GREs in the UAE have to repay USD 30bn of maturing loans this year and face a "significant" amount of debt falling due in 2014 & 2015. It was reported that Abu Dhabi has picked four banks to advise on merger of Aldar Properties and Sorouh Real Estate. Goldman Sachs & NBAD will advise a steering committee while Morgan Stanley & Credit Suisse will advise the developers. Aldar lost 11.2% during the month while Sorouh shed 13.3% Abu Dhabi government has selected Arabtec Holding consortium that includes Greek and Turkish firms as preferred bidders for a USD 3bn airport expansion contract. Arabtec shares lost 11.7% in May. Kuwait S&P affirmed its 'AA/A-1+' long and short-term foreign and local currency ratings on Kuwait with Stable outlook. The ratings are supported by Kuwait’s rich resource endowment, and strong external & fiscal balance sheet positions while underdeveloped private sector and strong dependence on oil revenues constrained the ratings. Kuwait Central bank introduced new loan-to-deposit ratio (LTD) rules for banks to boost lending. Other sources of funding such as bonds and loans will also be allowed while calculating LTD. Kuwait National Petroleum is reportedly launching a tender to build the long-delayed Al-Zour refinery with a capacity of 615,000 bpd. Meanwhile, Dow Chemical was awarded USD 2.2bn in damages due to a failed JV with KPIC in 2008. Global Investment House won a legal battle over an aborted buy of a stake in National Bank of Umm Al Qaiwain after the court ordered return of USD 250mn deposit plus USD 79mn in interest. The company’s 1Q12 loss narrowed to USD 39.3mn from USD 79mn in 1Q11. Global was up 1% in May.

Volume was down 25% in the GCC while Value Traded dropped 38% to USD 49bn

Coast Investment & Development Co. is in advanced talks with banks to reschedule USD 232mn of debt. The company shed 21% for the month. Qatar Qatar has projected USD 49.2bn of spending in FY 2012/13, a rise of 28% over the previous year. Based on an average oil price of USD 65/bl, revenue is seen increasing 27%. The budget projects a surplus of 8% of GDP. Qatar Petrochemical Co. is reportedly re-examining the feasibility of a USD 6bn expansion of the Ras Laffan Petrochemical Complex. Qatar Telecom’s USD 1.9bn rights issue has been fully subscribed and part of the proceeds will be used to refinance debt. QTel’s Tunisian unit has been awarded licenses to for 3G, mobile and fixed-line networks. The stock has shed 5% for the month. Industries Qatar’s steel unit is seeking a 25% stake in a new Algerian venture and has earmarked QAR 1.5bn ($410mn) for investment. The stock lost 4.7% for the month.

Kuwait Financial Centre “Markaz”

6


RESEARCH June 2012 Liquidity, Risk & Valuation Volume decreased 25% MoM in the GCC and Value Traded also decreased 38% to USD 49bn. This was on the back of 22% MoM drop in volumes and 16% decrease in Value Traded in April. Saudi Arabia, which accounted for 88% of GCC’s total value traded, witnessed a 40% MoM drop in value traded. Risk in the GCC (as measured by the Markaz Volatility Index – MVX) dropped 7% in May. Risk in Kuwait was up 42% for the month while MVX Abu Dhabi shed 42%. Valuations dropped in the GCC as markets suffered two consecutive monthly losses. Most countries traded near the 8x-12x range. Chart Pack – GCC Figure: 12 – Saudi Arabia – PE Band

Source: Thomson Reuters Eikon

Figure: 14 – Abu Dhabi – PE Band

Source: Thomson Reuters Eikon

Figure: 16 - Oman – PE Band

Source: Thomson Reuters Eikon

Figure: 13 – Dubai – PE Band

Source: Thomson Reuters Eikon

Figure: 15 - Qatar – PE Band

Source: Thomson Reuters Eikon

Figure: 17 - Bahrain – PE Band

Source: Thomson Reuters Eikon

Kuwait Financial Centre “Markaz”

7


RESEARCH June 2012 Figure: 18 – Average Daily Value Traded (USD mn)

Figure: 19 - Risk & Return (June 2005 – May 2012) – GCC Vs Developed & EM 20% 15% 10% EM

CAGR

5% USA

0%

World

Oman Kuwait EAFE

Qatar

-5% GCC

Bahrain

-10%

Saudi Arabia UAE

-15% Source: Thomson Reuters Eikon, Markaz Research

-20% 10%

15%

20%

25% 30% Annualized Risk Figure: 20 – Comparative MVX Levels – May 2012

35%

40%

45%

Source: MVX is a proprietary volatility index developed by Markaz Research

Kuwait Financial Centre “Markaz”

8


RESEARCH June 2012 Figure: 21 – US Dollar Returns on GCC Markets

Figure: 22 - Saudi Arabia Repo Rate

Figure: 23 - Kuwait Rates

Figure 24: Dubai CDS 5 yr 1000

Dubai CDS

900

Historical Average

800 700 500 403

400 300

May-12, 371

200 100 May-12

Feb-12

Nov-11

Aug-11

May-11

Feb-11

Nov-10

Aug-10

May-10

Feb-10

Nov-09

Aug-09

May-09

Feb-09

Nov-08

Aug-08

May-08

Source: Thomson Reuters Eikon

0 Feb-08

Bps

600

Kuwait Financial Centre “Markaz”

9


RESEARCH June 2012 Data Tables – GCC Data Table: 1 - Value & Volume Traded Indicators Volume Parameters LTM Avg % of % of Volume Volume MoM Volume Value Traded Traded Deviation Traded Traded (Mn) (Mn) (%) Saudi 39% 88% Arabia 8,347 6,470 -34% 42% 5% Kuwait 8,847 5,335 1% 16% 3% UAE 3,509 4,229 -41% Qatar 1% 4% 303 181 15% 1% 0% Oman 228 230 -63% 0% 0% Bahrain 63 46 164% Total GCC 21,297 16,492 -25% Source: Markaz Research

Value Parameters LTM Avg Value MoM Traded Deviation (USD Mn) (%)

Value Traded (USD Mn) 43,402 2,263 1,385 2,076 187 30 49,343

38,029 1,959 1,480 1,631 182 23 43,303

-40% -19% -40% 8% -43% 222% -38%

Data Table: 2 - Value traded (USD Bn) 2004

2005

2006

2007

2008

2009

2010

2011

2012

Saudi (TASI)

473

1103

1403

682

522

338

202

291

297.9

Kuwait (KSE)

51

97

60

131

134

75

44

22

13.9

Abu Dhabi (ADX)

4

29

19

48

83

19

9

7

3.0

Dubai (DFM)

14

110

95

103

63

48

19

9

8.3

Qatar (DSM)

6

28

21

30

47

26

19

23

8.7

Oman (MSM) Bahrain (BAX) Total Source: Zawya

2

3

2

5

9

6

3

3

1.2

0.4 550

0.6 1371

1.4 1601

0.9 1000

2.2 860

0.48 512

0.29 296

0 354

0.1 333

Data Table: 3 - Blue Chips Performance M.Cap (USD Bn)

Last Close

Monthly Change

YTD

2011 Change

P/E TTM

1Q 2012 Earnings

PAT (YoY Growth)

75 29 21 15 11

93.5 72.8 40.2 13.2 46.7

-8.8 -6.7 -5.4 -3.6 -9.8

-3 5 19 -5 0

-8 -16 -21 -1 -24

10 14 9 23 10

7,271 2,011 2,521 -583 1,145

-5 18 60 NM 2

19 9 7 4 5

8.8 8.7 8.7 2.7 2.9

1.6 -0.5 -3.3 -4.2 -11.0

-3 9 12 -8 13

-15 12 -11 7 -28

12 9 7 9 9

1,809 1,041 935 641 606

0 12 7 -55 44

ZAIN NBK KFH Gulf Bank Comm. Bk. Kuwait

11 16 8 4 3

0.7 1.1 0.8 0.4 0.8

-4.1 0.0 2.7 -6.8 -3.8

-21 4 -10 -16 -5

-41 -14 -16 -11 -14

10 15 28 38 -

71 81 20 7 0.3

1 0 -11 -25 -75

Qatar (QAR) Industries Qatar QNB Ezdan Real Est. Co. Q-TEL Comr’cial Bk of Qatar

21 26 15 10 5

138.9 133.7 20.0 114.5 71.7

-4.9 0.2 3.9 -6.1 -0.4

4 -3 -10 21 -15

-4 14 -27 -5 -9

10 11 155 12 9

1,907 2,004 144 711 471

-9 17 291 -12 6

Companies Saudi Arabia (SAR) SABIC Al-Rajhi Bank Saudi Telecom Saudi Electricity Co. Samba Fin. Group United Arab Emirates (AED) ETISALAT NBAD First Gulf Bank Emirates NBD Emaar Properties Kuwait (KWD)

Source: Excerpt from Markaz Daily Morning Brief

Kuwait Financial Centre “Markaz”

10


RESEARCH June 2012


RESEARCH June 2012

Disclaimer This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by the Central Bank of Kuwait. The report is owned by Markaz and is privileged and proprietary and is subject to copyrights. Sale of any copies of this report is strictly prohibited. This report cannot be quoted without the prior written consent of Markaz. Any user after obtaining Markaz permission to use this report must clearly mention the source as “Markaz “.This Report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to its accuracy or completeness. Markaz has no obligation to update, modify or amend this report. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. Accordingly, investors may receive back less than originally invested. Past performance is historical and is not necessarily indicative of future performance. Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals, with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. For further information, please contact ‘Markaz’ at P.O. Box 23444, Safat 13095, Kuwait. Tel: 00965 1804800 Fax: 00965 22450647. Email: research@markaz.com


MRJune2012