Investor Letter Rasmala Investment Eye on MENA Equity Markets

Transcription

1 Issue August 2014 Inside this issue: Macroeconomic Recap Prospects & Outlook Building The Portfolio Sector Strategy Rasmala Investment Eye on MENA Equity Markets H Looking for Secure Growth Eric Swats, CFA Head of Asset Management Ahmed Abou El Saad, CFA Co-Head of MENA Equity Head of Egypt Muhammad Shabbir, CFA Co-Head of MENA Equity Head of GCC About Rasmala Established in 1999, Rasmala is a MENA based institutional boutique asset management firm specializing in the professional money management across diverse asset classes namely MENA equities, fixed income and money markets both conventional and Islamic. it possesses a strong track record and investment engine that manages an overall AuM USD of 1.3bn. Rasmala s investment engine spans the whole MENA region with presence in UAE, Egypt, Oman. To find out more about us, please visit us at: The first half of 2014 was dominated by several regional developments including the long-awaited elevation by the MSCI of Qatar and UAE to emerging market status, as well as ongoing rumors regarding Qatar s status as the host of the 2022 FIFA World Cup. Most recently, however, the market & momentum seems to be hinging on the news of Saudi Arabia opening up its stock market to foreign investment early next year as well as signs of security risk emerging out of Iraq. Both the Qatari and UAE equity markets were upgraded by the widely followed index provider Morgan Stanley Capital International ( MSCI ) from their Frontier Markets index to their Emerging Markets index. While most GCC-based investors, ourselves included, have never considered MSCI s index classification of the GCC markets to be a measure of investability, many other international investors are bound by their investment mandates, which often restrict them from investing outside of their respective benchmark indices, and therefore these markets have been off limits. The clearest example of this is index funds, particularly Emerging Markets Index Funds. From our perspective, the reclassification is a small positive step in the forward evolution of the GCC markets, and only to the extent that the reclassification will encourage local companies to once again utilize their exchanges to raise capital will these reclassifications have any lasting economic impact. In Egypt, President Sisi won a whopping 96.9% of the election votes. Despite the skepticism around what many commentators describe as a return to military rule, the expected political calm and the newly announced economic policies should have a positive impact on Egyptian economic activity, and quite possibly lead to a return of regional and other foreign investor. Prior to Mubarak s overthrow, investors were often mostly worried about post Mubarak risk: what happens when Mubarak is no longer in office? And now that political stability can be expected for some period of time to come, this risk is no longer at the forefront of investors minds. Over the next months, we will see a settling of the political scene and priorities; most notably including the restoration of security and the rule of law, Government led economic reformations and restructurings, and efforts to cut the large and unsustainable Government budget deficit. Lastly, the World Cup football tournament has refocused attention to the selection of Qatar as the host of the 2022 World Cup. Allegations of bribery, and other misconduct, have cast a shadow over Qatar, and the whole bidding process, with many stakeholders publicly declaring a redo of the selection process. Given the expected infrastructure spending plans necessary to host the tournament, and the possible cancellation of such plans, investor sentiment in the Qatari story has been shaken. All of this activity has led to heightened volatility in certain MENA markets, and in the shares of specific listed companies. We are happy to communicate that our portfolio managers and analysts have been able to anticipate and profit from these macro led market movements, and have delivered strong investment performance for our clients irrespective of their investment strategy, market focus or asset class. By focusing on bottom up security selection based upon a thorough understanding of investee company s businesses, we are confident that our investment approach will continue to deliver such strong returns in the future.

2 Macroeconomic Recap The three months of the second quarter were quite volatile in the market, particularly in the UAE. First the market rose about 14% on the back of extended euphoria of MSCI upgrade. Then the slippage started beginning from the end of May after the selected nine names got included in the coveted index for the emerging markets. The cause for slippage could be either the stretched out positions of margin investors in the market or the unraveling of saga at Arabtech or both. The heavy correction in Arabtech began with the news that its CEO has increased his stake in the company to 28%, which exceeded that of its principal shareholder Aabar, then Aabar decreasing its stake by a few percentage points, and culminating in the resignation of the CEO. In Qatar, the market gave up a big part (16%) of its gains since the beginning of the quarter on the back of negative media focus regarding the future of its FIFA 2022 World Cup bid. While the jury is still out on that particular issue, the market has recovered some ground in early July. The Saudi market also had a decent quarter despite some pressure towards the end of June. There was no market wide trigger overall. However, the news of the termination of merger talks with Etihad Atheeb (a telcom operator in Saudi) proved to be quite negative for Mobily a market cap heavy name. In Egypt, the election of President el Sisi resulted in an improvement in the political risk profile of the country. However, the announcement of a capital gains tax in June and cut to fuel subsidies in early July appears to have dented investors sentiment. Prospects and Outlook We believe that four factors will play a deciding role in determining the future shape and direction of our MENA equity strategy: 1. The relative slowdown of non-oil economic growth in the GCC IMF data suggests a relative cooling off although local sources contradict this and spending is still robust 2. The impact of the emerging situation in Iraq ( Islamic State factor) could prove to be a region-wide overhang, should the situation deteriorate from the current stalemate 3. The rise of volatility across the GCC equity markets and the slowdown of momentum driven rally in Egypt equities 4. The impact of rise in energy costs and tax hike in Egypt We expect that the combination of these four factors, alongside more positive developments taking place on the ground, will set the overall direction for the regional markets in the coming three to six months. In the UAE, the announcement of new projects spending (such as the Mall of the World ), the planned Emaar Malls IPO, and robust growth in the core trade and tourism sectors will be key drivers. In Saudi Arabia, spending is likely to remain robust despite labor related bottlenecks; strong money supply growth and a pick up in lending to industrial, construction and services sectors will help boost output. In Egypt, focus on mega projects and housing will boost the construction and building materials sectors. Also the initiation of economic reforms to help address structural imbalances will also be a positive driver, albeit likely over the medium term. The fundamentals of the underlying investable universe of companies are still intact with expectations of earnings growth of around 15% in 2014 holding ground. The second quarter results for Real Estate, Banking and Consumer sectors are expected to be strong and a recovery in the petrochemicals sector is likely on the back of stronger prices and better utilization rates. H

3 Building the Portfolio As a result of the significant volatility in both UAE and Qatari markets towards the end of the second quarter, we have lowered our allocation to these two countries and increased our allocation to Saudi Arabia. We are now underweight in the UAE (9% portfolio vs. 12% benchmark: Jun14) and have considerably reduced our allocation to Qatar, although it is still overweight compared to the benchmark (18% Jan14 vs. 15% Jun14, benchmark 9%). The allocation to Saudi Arabia is benchmark weight, with the possibility of further increase in the coming months. Our existing portfolio still has a considerable tilt towards growth, since we believe that nothing has materially changed at a fundamental level and, as second quarter results start pouring in, we will keep the growth tilt intact. Our new allocations of the portfolio reflect our view on the key driving factors that may impact regional equities in H2 2014, as well as a focus on secure growth opportunities at reasonable valuations. We continually review the investment thesis that informs our portfolio allocation to ensure that our existing ideas are still relevant and our positions still warranted. The chart and the table below reflect our current thematic allocations. The second largest theme comprises Saudi consumer discretionary names and it has a total allocation of 14.4%. The next two themes in order of weights are Saudi and Qatari general economic growth themes comprised mainly of financial services names. Based on our forward looking assessment of the prospects of various sectors and their underlying variables (given in the following table), we believe that an increase is warranted to the general economic growth theme, represented by the banking and energy names as well as industrials. We also we remain positive on increasing exposure to petrochemicals and telecom companies. Our exposure to the consumer sector will stay unchanged as we shift to consumer staples and away from the relatively expensive consumer discretionary names. The abating cost pressures in the former category have raised the prospect of profitability improvement on the back of better margins. We also hold our view on slightly increasing our telecoms exposure, as the sector is positioned to attract flows should a flight to safety occur during the dull months of summer ahead. Figure 1: Thematic Portfolio - Sectoral Allocation in (%) 0.4% 3.8% 4.4% 3.0% 4.8% 15.4% 3.7% 0.9% 6.2% 2.4% 6.4% 6.7% 2.1% 14.4% 1.0% 11.1% 11.8% 1.3% UAE - real estate, retail & hospitality KSA demographics KSA consumer discretionary Egypt - real estate and demographics Regional consumption growth UAE - corporate & commercial banking Qatar - economic & population growth KSA - economic growth Egypt - industrial revival Regional building & construction Kuwait - economic growth Egypt - economic growth Regional consumption - services Int'l food security - agriculture related UAE - construction materials Qatar - oil & gas capex KSA building & construction Int'l economic growth Source: Rasmala MENA Equity Team, July 2014 Out of the total 18 themes in the portfolio, the highest capital allocation of 15.4% is to the theme of international economic growth, which is represented by petrochemicals companies linked to the export sector. H

4 Sector Strategy Sector Allocation Direction Rationale Overview Banking Reasonable valuation and dividend yield; good defense against economic slowdown Loan growth remains significant in the UAE and Saudi. Qatar as well as Kuwait has seen a slowdown. Personal sector remains a driver of growth in the UAE in contrast to Saudi Arabia and Qatar where loan demand is driven by the corporate sector; short term pressures on Saudi banks due to labor exodus remain; loan to deposit ratios remain healthy across the region with the exception of Qatar and UAE where these are stretched; improving industry dynamics make us optimistic about the UAE banks. NIMs should improve in the UAE and stabilize in KSA. Qatari and Omani banks to experience increased pressure on NIM. We play the sector by being O/W Saudi and UAE and selective in Qatar. Petrochemicals Valuations are undemanding compared to other sectors and dividend yield is healthy A relatively better economic outlook and higher oil prices have supported prices in Q2. The increase in production capacity as well as expectations of higher payouts remains the key criteria for relative outperformance. Fertilizers remain the weak link as pressure on prices continues. Telecoms Valuations discount to the market and defensive nature Buoyed by increased internet and data usage and high disposable income. Net Income for the 2014 is expected to be 10% higher for the GCC region. We like companies expanding their reach to the corporate segment like STC and value plays like Oman Telecom. Consumer and retail Expensive sector with limited catalysts for change. However, growth outlook stays intact for high quality names. Higher disposable income, larger young population base, growing aspirations and consistent flow of tourists continue to remain the major key growth drivers for the GCC consumer and retail industry. We expect a noticeable gross margins improvement for companies like Savola and Agthia. We favor retail companies with international operations such as Al Hokair and Jarir. Source: Rasmala MENA Equity Team, July 2014 H

5 Contact Details Eric Swats Head of Asset Management Rasmala Investment Bank Ltd. Dubai International Financial Centre The Gate Village, Building 10, Level 1 P.O.Box Dubai, United Arab Emirates Disclaimer This report is prepared by Rasmala Investment Bank Limited ("RIBL"). RIBL is regulated by the Dubai Financial Services Authority ("DFSA"). RIB products or services are only made available to customers who RIB is satisfied meet the regulatory criteria to be a " Professional Client", as defined under the Rules and Regulations of the Dubai International Financial Centre ("DIFC"). Investment recommendations take into account both risk and expected return. We base our long-term fair value estimates on a fundamental analysis, after having taken perceived risks into consideration. We have conducted reasonable research to arrive at our investment recommendations and fair value estimates for a product mentioned in this report. Although the information in this report has been obtained from sources that RIB believes to be reliable, we have not independently verified such information thus it may not be accurate or complete. RIB does not represent or warrant, either expressly or impliedly, the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by RIB or any other person for any loss howsoever arising, directly or indirectly, from any use of such information or opinions or otherwise arising in connection therewith. Matters of past performance in this document should not be taken as an indication or guarantee of future performance and RIB makes no representation or warranty, express, implied or otherwise, regarding future performance. The market value of any security and estimated income may be affected by changes in economic, financial, (including, but not limited to, spot and forward interest), and political factors time to maturity, market conditions, and volatility and the credit quality of any issuer or reference issuer. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This report is prepared for general circulation and is intended for general information purposes only. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any securities referred to in the report. It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this report. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs. RIB and its group entities (together and separately, "Rasmala") does and may seek to do business in securities covered in its reports. As a result, users should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Rasmala and its respective employees, directors and officers shall not be responsible or liable for any liabilities, damages, losses, claims, causes of action, or proceedings (including without limitation indirect, consequential, special, incidental, or punitive damages) arising out of or in connection with the use of this report or any errors or omissions in its content. The research analyst or analysts responsible for the content of this report certify that: (1) the views expressed and attributed to the research analyst or analysts in the report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this report. H