Market Review and Outlook

Transcription

1 Market Review and Outlook NCB Weekly Views on Global, Regional and Local Economic and Financial Developments April 12, 2009 Special Focus: A Bleak Outlook for M&A Activity Headlines Saudi Macro and Equity Market SCIs: From Accumulation to Utilization of Savings 2 US Macro and Equity Market The Drive towards a Sustainable Mortgage Modification 3 Commodity Markets IEA Reduces its Oil Demand Forecasts 4 Global Macro A Bleak Outlook for M&A Activity 5 FOREX Market USD: Largest Advance since Nov08 6 Global Equity Markets Will the US Equities Maintain the Uptrend? 7 Saudi Arabia Leading Economic Indicators 2008 Latest Period Average WTI, Cushing 1M, USD/bbl YTD Weighted Average Arabian Light, USD/bbl YTD Average 3M USD LIBOR 2.93% 1.23% 09YTD Average 3M SAR SAIBOR 3.37% 1.35% 09YTD Average Spread, in Basis Points, SAIBOR-LIBOR YTD Y/Y Growth in Monetary Base (M0) -0.35% 17.49% Jan09 Y/Y Growth in Money Supply (M3) 17.6% 13.9% Jan09 Saudi Arabia Liquidity and Risk Detector Head of Research Said A. Al Shaikh, PhD Editor/Chief Economist s.alshaikh@alahli.com Authors Tamer El Zayat, PhD t.zayat@alahli.com Basis Points Mar-02 Mar-03 Spread, SAIBOR - LIBOR, LHS 3M SAR SAIBOR, RHS 3M USD LIBOR, RHS Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 % Mar Sources: Reuters and NCB Last updated: 10 April 2009

2 Saudi Macro and Equity Market SCIs: From Accumulation to Utilization of Savings In our previous report, we have pointed to the pivotal role that will be undertaken by the Specialized Credit Institutions (SCIs) in order to protect the domestic economy from the depressed global economic activity. According to the latest data (1H2008), the consolidated balance sheet for SCIs points to: (1) a significant increase in the disbursements of new loans by SAR7.35 bn in 2Q08, the largest quarterly disbursement on record, reflecting the drive to support domestic activity, (2) an increase of 1 in the total value of investments to a historical record of SAR78.3 bn by the end of 2Q08, especially in the domestic portfolio that increased from SAR65.7 bn to SAR72.3 bn, and (3) the reduction in deposits with local banks by around SAR2 bn, indicating future plans to utilize excess funds to extend loans and invest in local companies. In our opinion, the budget appropriations for 2009 coupled with the latest data show a pickup in SCIs activity, and it will not be surprising that 2008 and 2009 will post new historical figures. Bottom-line, although the accumulation of savings from the oil windfall was important, the utilization of savings in the most efficient manner will be more important, and apparently the Kingdom is heading towards that direction. Key Macroeconomic and Equity Market Indicators Last Previous YTD 2008 Oil Price, $bbl Mar Feb Oil Production, mmbd Real GDP 4.2% 3.4% Feb Jan CPI Inflation, Y/Y 6.9% 7.9% Broad Money (M3), Y/Y 13.9% 17.6% Credit, Private Sector 23.9% 27.9% 4Q08 3Q08 Credit, Corporate 43.2% 53.9% 4Q08 3Q08 Credit, Households -2.3% -3.7% Y/Y Growth in Credit (Private Sector) J-05 J-06 J-07 J-08 J-09 Y/Y CPI Inflation Rate 2 15% 1 5% Food and Beverages Overall J-05 J-06 J-07 J-08 J-09 Tadawul All Share Index: 31 Dec 08 = 15% 1 5% -5% Jan-09 Feb-09 Mar-09 Apr % Average Daily Traded Value (SAR bn) YTD Net Claims on Government Loan-to-deposit Ratio % 84.2% Excess Reserves/Total % 1M2009 1M2008 Import LCs, SARbn Net Foreign Assets in the Banking System USDbn J-05 Sources: SAMA, Reuters. Notes: 1/Oil price: Weighted Average Arabian J-06 J-07 J-08 J Light. 2/Oil production: Million barrels per day of crude oil. 3/Net claims on government: Banking sector claims on the central government less central government deposits in the banking system in SAR bn. 4/Loan-to-deposit ratio: The ratio of bank claims on the private sector (excluding investments in private securities) to total deposits, as reported on the consolidated balance sheet of banks. 5/Excess reserves/total: The ratio of excess reserves held by commercial banks in SAMA to total bank deposits in SAMA. 6/ Import LCs: The cumulative e of letters of credit opened by banks to finance private sector imports. Banks SAMA 2 Price Performance of Sector Indices Insurance Media Hotel Cement Banking Petroche Indust Inv Agric Telecom Energy Transport R. Estate Retail Multi Inv Construct YTD Week

3 US Macro and Equity Markets The Drive towards a Sustainable Mortgage Modification In Feb, President Obama had announced a modification plan that centers on refinancing and modifying loans for 9 mn families. This announcement had since raised questions about the viability of such policies in easing the pressures on homeowners, especially as job losses and falling home prices exert a larger impact on delinquencies than mortgage terms. The recent data subscribe to an alternative course of action that reduces the debt-to-income ratio by granting loans to homeowners in order to bridge the income loss for the next two years caused by unemployment. Notably, the data showed: (1) more than 58% of the loans modified in 2008 did not result in a reduced monthly payment, (2) 31.3% of loans modified in 3Q08 were in re-default 3M after modification, which is higher than the 26.8% re-default rate registered in 2Q08, and (3) an increase in the percentage of delinquent prime mortgages from 1.11% in 1Q08 to 2.4% in 4Q08. In our opinion, the government must ensure the sustainability of mortgage modifications by reducing mortgage payments and injecting cash into faltering households. Key Macroeconomic and Capital Market Indicators Latest Next 4Q08(F) 1Q09(A) Real GDP Apr Mar Apr Unemployment May Mar Apr A. H. Earnings, M/M May CPI Inflation, Y/Y Apr Real GDP Growth, Annualized 1 7.5% % -2.5% 4Q04 4Q05 4Q06 4Q07 4Q % Annual Quarterly Benchmark Yields, Annualized 4. 3-Apr Apr M 3M 6M 2Y 5Y 10Y 30Y Core PCE, Y/Y Apr Existing Home Sales, M/M Apr Housing Starts, M/M Apr Trade Balance, $bn May National Unemployment Rate 1 7.5% % Benchmark Equity Indices NASDAQ S&P 500 DJIA YTD Week M-05 M-06 M-07 M-08 M Retail Sales, M/M Apr Industrial Production, M/M -1.4% 15-Apr Capacity Utilization Apr Jan Apr Fed Funds Rate 0.25% 28-Apr Target Fed Funds Rate/Core PCE 1 7.5% % Fed Funds Core PCE M-05 M-06 M-07 M-08 M-09 MSCI US Sector Indices IT Materials C. Disc. Telecom Energy H. Care C. Staples Utilities Industrial Financials -15% -5% 5% 15% Sources: Reuters, Bureau of Labor Statistics (BLS), and Bureau of Economic Analysis (BEA). 3

4 Commodity Markets IEA Reduces its Oil Demand Forecasts International energy institutions continue to slash and revise to the downside their expectations for the global oil demand, as the worldwide economic downturn shows no end in sight. The International Energy Agency (IEA) is no different, reducing its 2009 oil demand forecast for the eighth consecutive month (Mar09) by an additional 1MMBD to 83.4 MMBD, a 2.4 MMBD less than in In addition, the IEA monthly report reflected four adjustments to its outlook for the oil industry and the global economy, notably: (1) a pace of demand contraction that will resemble the early 1980s levels, (2) an oil demand recovery, which will be deferred to 2010, (3) the supply from the non-opec countries will drop in 2009 (300 TBD) compared to an earlier forecast of a stable output level, and (4) a decline in the global GDP by 1.4% in Over the next five years, the IEA predicts that the current lower levels of oil prices will constraint global supplies since that will discourage investment spending on new production, which is expected to decline by a significant 2 in Obviously, the IEA constant revisions reflect how the ailing global economy is weighing heavily on the outlook for the oil industry. Key Commodity Prices and Indices Last Week WTI, Spot, $/bbl Brent, Spot, $/bbl Gold, LME, $/Oz Silver, LME, $/Oz Platinum, $/Oz Palladium, $/Oz Aluminum, LME, $/t Copper, LME, $/t Nickel, LME, $/t Zinc, LME, $/t Wheat, Mar, $/Bushel Corn, Mar, $/Bushel Soybeans, Mar, $/Bushel Benchmark Crude Oil Prices Precious Metals 3 15% WTI Goldman Sachs Agriculture Index Brent -15% Gold -3 Silver 15% 1 5% -5% -1-15% Saudi Arabian Light, Asia Deliveries Base Metals Baltic Exchange Dry Index Copper Aluminum -5 Notes: All variables depicted in the charts above are rebased to in the last trading day in

5 Global Macro A Bleak Outlook for M&A Activity In 2008 and 1Q09, the world had witnessed a continuous decline in mergers and acquisitions (M&As), as the ensuing financial crisis spares no region, country or industry. The worldwide volume of M&As amounted to USD472.7 bn in announced deals during 1Q09, a 29.3% decline from 2008 and the lowest level for quarterly deal activity since 3Q04. In addition, the decline in the actual number of announced deals illustrates the difficult business environment; with just over 8k worldwide deals announced during the 1Q09 compared to more than 10k deals during the past nine quarters. In particular, M&A activity in Europe, the Middle East, and Africa declined by 47.8% Y/Y in 1Q09, reaching USD179.8 bn while it fell by 48.9% to USD99.2 bn for the emerging market as a whole. This reflects the ailing status of capital markets, especially that IPOs had lost their appeal and debt issuances had been crowded-out by government issuances. We expect the decline to continue throughout 2009 as the economic slowdown reduces global demand, and in turn, the need for large and diverse entities. Selected Global Macroeconomic Indicators Growth* Inflation* Policy Rate* Policy Rate Change 2007 Last Period Last Date Target Last Decision Date Cumulative 09YTD Europe/Japan/Oceania Euro Zone 2.6% 0.6% 3Q08 1.2% Feb % -0.25% 5-Apr-09 UK % 4Q08 3.2% Mar Mar-09 Japan 2.4% -3.2% 4Q08 Mar Hold 19-Feb-09 Australia % 4Q08 3.7% Dec % Hold 3-Mar-09 New Zealand 3.2% -0.9% 4Q08 3.4% Jan Dec-08 Latin America/Caribbean Mexico 3.2% -1.6% 4Q08 6.3% Nov % -0.75% 20-Mar-09 Brazil 5.7% 1.3% 4Q08 6.6% 15-Dec % 11.25% Mar-09 Chile 5.1% 0.2% 4Q08 7.2% Dec % Mar-09 Asia/Southeast Asia China 11.9% 6.8% 4Q08-1.6% Mar % -0.27% 22-Dec-08 India % 3Q08 5.6% Jan Jan-08 Hong Kong 6.4% 1.7% 3Q08 0.8% Feb Oct-08 Singapore 7.7% -3.7% 4Q08 1.9% Mar South Korea % 4Q08 3.9% Apr Hold 12-Mar-09 Indonesia 6.3% 6.1% 3Q08 7.9% Apr Apr-09 Thailand 4.9% -4.3% 4Q08-0.2% Apr % Dec-08 Malaysia 6.3% 4.7% 3Q08 3.7% Feb % -0.25% 24-Nov-08 Eastern Europe/Central Asia Russia 8.1% 6.2% 3Q08 1.7% Mar % Nov-08 Turkey 4.6% -6.2% 4Q08 7.9% Apr Mar-09 E. Zone Middle East/Africa Qatar Saudi Arabia 3.4% 4.2% % Feb Jan-09 UAE Kuwait 9.9% 6.3% % May % -0.25% 30-Oct-08 Oman Qatar % % Mar Hold 23-Jan-08 Bahrain UAE 9.4% 5.2% % Oct-08 Oman 7.2% % May Hold 4-Mar-09 Jordan Bahrain 7.9% 6.5% % Oct % Hold 5-Feb-09 Egypt Jordan 8.1% 6.2% % Jun Nov-08 Egypt 6.9% 7.1% 2006/ % Sep Feb-08 S. Africa South Africa Q08 8.6% Mar % Mar-09-6% -4% -2% Notes: 1/Growth: Real GDP Growth Rate, 2007: Y-o-Y % change in full year GDP, Last/Period: Quarterly GDP growth rate annualized unless otherwise indicated. 2/CPI Inflation: Y-o-Y % Change in CPI, Target: Central bank/monetary authority inflation target.. 3/ Policy Rate: Last: Current policy rate, Decision/Date: Decision taken in latest meeting/date of latest meeting. UK Japan Australia NZ Mexico Brazil Chile China India H. Kong Singapore S. Korea Indonesia Thailand Malaysia Russia Turkey KSA Kuwait 5

6 FOREX Market USD: Largest Advance since Nov08 The USD trade-weighted index had registered a significant 1.9% gain against six of its largest trading partners, which is the biggest weekly advance since Nov08. Specifically, the USD had posted strong increases against the EUR and GBP by 2.3% and 1.1%, respectively. The upside drivers included: (1) the better than expected profit result for Wells Fargo, the second-largest US home lender, with its 1Q09 net income surging by 5, (2) expectations of further rate cuts by the ECB, which can bring the official rate below 1%, thus, reducing the interest rate differential with the USD, and (3) an announcement by Goldman Sachs of a possible multibillion USD share sale that will be used to help repay the USD10 bn government loan. Obviously, Wells Fargo s results had provided a boost of confidence in banks, triggering the steepest one-day gain on record in the S&P500 s banks index. In our opinion, however, volatility will persist into 1H2009 as uncertainty continues to dominate investors perceptions, especially in weighing the impact of favorable news against the continuous stream of unfavorable news. Key Spot Foreign Exchange Rates $ per * Rate versus $ Last Week 09YTD Last Week -2.2% 09YTD -5.7% Europe/Oceania Swiss Franc (CHF) CLP 2 Australian Dollar (AUD) % BRL New Zealand Dollar (NZD) % 1 ZAR -1-2 Last Week -1.1% 09YTD 0.3% 1 5. $ per * Last Week -0.1% 09YTD 10.7% 2 1 per $* -1-2 Latin America/Caribbean Mexican Peso (MXN) % Brazilean Real (BRL) % Chilean Peso (CLP) % Asia/Southeast Asia Chinese Yuan (CNY) Indian Rupee (INR) % Hong Kong Dollar (HKD) Singaporean Dollar (SGD) % South Korean Won (KRW) 1, % Indonesian Rupee (IDR) 11, % Thai Baht (THB) Malaysian Ringgit (MYR) Eastern Europe/Central Asia Russian Rouble (RUB) % Turkish New Lira (TRY) % Middle East/Africa Saudi Riyal (SAR) Kuwaiti Dinar (KWD) % Qatari Riyal (QAR) UAE Dirham (AED) Omani Riyal (OMR) Bahraini Dinar (BHD) Jordanian Dinar (JOD) % Egyptian Pound (EGP) % South African Rand (ZAR) % MXN AUD JOD SAR QAR BHD OMR AED HKD NZD CNY TRY THB EGP INR IDR MYR KRW KWD SGD CHF RUB -1-5% 5% 1 6

7 Global Equity Markets Will the US Equities Maintain the Uptrend? US stocks maintained their upward trend for yet another week, capping the steepest rally since 1933 on the back of higher than estimated earnings and speculation that 19 banks will pass the stress tests administered by the Fed. The S&P500 and the Dow Jones Industrial Average registered gains of 1.7% and 0.8%, respectively, recording positive figures for a fifth week. In particular, the S&P500 financials index, a gauge of 80 financial companies, increased by a staggering 9.4%, as Wells Fargo s profit beat estimates and Treasury considered bailouts for life insurers. Bank of America, Wells Fargo and JP Morgan surged by 26%, 2 and 12%, respectively, which propelled the S&P500 banks index to record the steepest one day gain since the inception of the sub-index in Moreover, life insurers such as Lincoln National Corp and Principal Financial Group increased by around 37%. The weekly advance could have been more impressive if it was not for Wal-Mart s sales increasing at a lower rate than that estimated by analysts. In our opinion, the change in mark-to-market accounting guidelines had helped Wells Fargo and it is expected that other banks results will show rosier quarterly performances going forward. Major Global Equity Markets and Indices, Local Currency (LC) Terms MSCI G7 Last Week 1. 09YTD -6.4% -5. MSCI EM Last Week 3.1% 09YTD 12.2% Country/Index Week 09YTD Europe/Japan/Oceania UK (FTSE100) -1.1% China Germany (DAX30) 2.4% Russia France (CAC40) 0.5% Brazil Japan (N225) 2.4% S. Korea Australia (All Ordinaries) -1.5% India N. Zealand (NZSX50) -1.7% A. Dhabi Latin America/Caribbean Mexico (IPC) -1.9% Brazil (Bovespa) 2.6% Chile (IGPA) 1.1% Asia/Southeast Asia China (Shanghai-C) 1. India (BSE-Sensex) 4.4% Hong Kong (Hang Seng) 2.4% Singapore (Strait Times) 0.4% S. Korea (KOSPI-C) 4.1% Indonesia (Jakarta-C) -2.3% Thailand (SET) 1.2% Malaysia (Kuala Lampur-C) 0.5% -2 Eastern Europe/Central Asia Russia (RTSI) 9.6% Turkey (ISE National 100) 8.3% Dow Jones Islamic Last 1,446.2 Week 0.5% 09YTD -2. Middle East/Africa 2 KSA (TASI) 4.7% Kuwait (KSEI) 5.1% 1 Qatar (DSM20) Abu Dhabi (ADI) 4. Dubai (DFMGI) 4.6% Oman (MSM30) 5.9% -1 Bahrain (All Share I) 0.7% Jordan (ASE General I) 1.3% -2 Egypt (CASE30) 9.7% S. Africa (JSE All Share Index) -1.1% 7 Chile KSA Indonesia Malaysia Turkey Egypt Singapore H. Kong Dubai Japan Jordan Australia S. Africa Thailand NZ Germany Kuwait France Mexico UK Bahrain Oman Qatar

8 NCB Economics Department The Economics Department Research Team Head of Research Said A. Al Shaikh, PhD Editor/Chief Economist Sector Analysis/Saudi Arabia Muhammad Y. Malick Perihan Al-Husseini Zulfiqar Bashir, PhD Macroeconomic Analysis Tamer El Zayat, PhD Management Information System Majed A. Al-Ghalib MIS Specialist Mohamad Jomaa Economist Dana Nammari Economist Disclaimer: The information and opinions in this research report were prepared by NCB s Economics Department. The information herein is believed by NCB to be reliable and has been obtained from public sources believed to be reliable. However, NCB makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute the current judgment of the author/authors as of the date of this report. They do not necessarily reflect the opinions of NCB as to the subject matter thereof. This report is provided for general informational purposes only and is not to be construed as advice to investors or an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or other securities or to participate in any particular trading strategy in any jurisdiction or as an advertisement of any financial instruments or other securities. This report may not be reproduced, distributed or published by any person for any purpose without NCB s prior written consent. To be added to the NCB Economics Department Distribution List Please contact: Mr. Noel Rotap Tel.: Fax: n.rotap@alahli.com