QNB ‘cautiously optimistic’ on GCC equities

31/05/2016 07:43 AST

QNB, the region’s largest lender, said yesterday it was cautiously optimistic about the short term investment outlook in the GCC capital markets following the recent changes in macro environment. QNB’s outlook for GCC equities is ‘positive to neutral’ .

“Recent reversal of the crude oil prices from the lows in January has injected a much need shot of optimism. However, we remain guarded whether the current price levels will be maintained,” QNB noted in its “Investment Outlook” released yesterday.

In terms of 1Q’2016 earnings, a majority of the sectors such as banks, petrochemical and retail companies in GCC has reported an increase in earnings above the market expectations. The recent economic and stock market reforms announced by the highest authorities in Saudi would have an overall positive impact on all the regional markets. In the geopolitical front, the recent efforts to resolve the regional conflicts have also raised hope for a political settlement in some issues which will boost investor confidence, the report said.

Globally, QNB remains Neutral equities in the near term (over three months) and Overweight over 12 months. In its view, valuations are not cheap due to the recent rally but earnings forecast have been downgraded.

“Wait and see for more stable growth and higher inflation expectations, we believe equities will struggle to see a decisive rally. Over 12- months, we believe equities remain relatively attractive given return forecasts and our belief that growth and inflation should pick up eventually, with reflation gaining momentum.”

QNB is neutral and negative on Bonds. Discounting of investors of a rate hike postponement has yielded a strong rally in USD denominated Fixed Income so far which may get pulled back going forward with the emergence of better economic indicators. In the regional space too the above phenomenon along with new supply may have some price pressure as investors tend switch to new issues from the existing ones in an attempt to lock in at better yields. Further regional spreads can be expected to widen going forward with growth slowdown and continuous rating down grade pressures. However selective opportunities are available for investors intending to be long on Bonds with intermediate duration focus of 3-5 years.

QNB, which is negative in its outlook for Commodities said it remains Underweight on commodities over 3 months as it believe the recent commodity rally might be self-defeating and thus short-lived.

“Until more fundamental supply adjustments take place, we continue to expect oil price to range of $35-$45/bbl during Q2 2016, and to rise above $35/bbl and close to $45/bbl by year-end. We are Neutral over 12 months and believe a flattening of the forward curve in H2 2016 will signal adjustments are taking place. This should drive stabilising oil prices and positive carry for commodity investors as the curve moves into backwardation. Until then, we believe negative roll yields will continue to weigh on returns”, the report said.

QNB continues to expect industrial metals price weakness due to a combination of excess supply and weak demand. it maintains its bearish view on gold, which has rallied due to lack of conviction in US growth and a weaker USD. Better US growth and higher real rates should drive gold prices higher. Overall, the growth for the whole GCC is expected to be in the region of 1.5-2.0 percent in 2016. PMIs in Saudi Arabia (54.2 percent) and the UAE (52.8 percent) edged down in April despite the pick- up in oil prices. The unveiling of the Saudi National Vision 2030 generated much optimism, but implementation will be key.

On the Global outlook, QNB said fears about a global recession triggered by a Chinese currency crisis have receded with the stabilisation of the yuan and the recovery of foreign - exchange reserves.

The US economy slowed down in Q1, but is expec

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