Monthly Newsletter He who awaits much can expect little - Gabriel Garcia Marquez

Transcription

1 Asset Management Dept. Monthly Newsletter Monthly Newsletter He who awaits much can expect little - Gabriel Garcia Marquez June 7 th, 2017 Nobody understands another s sorrow, and nobody another s joy - Franz Schubert Clues from Recent Asset Classes Behavior Macro: Deceleration in the US Encouraging Signs from Europe & Japan Oil: Inventories are Falling Awaiting Rebalancing MENA: A Geopolitical Earthquake in GCC Introduction The rally in equity markets, particularly in the US, did not derail from its track despite a credit rating downgrade in China, terrorist attacks in the UK, geopolitical tensions in the GCC, missiles testing in North Korea, a testimony by the former FBI chief before the Congress in relation to potential Russian interference in the US presidential election, and a crack in the western alliance between Germany and the US. Asset Management Team: Wassim Jomaa, CFA VP, Head of Asset Management Wassim.Jomaa@Capitalinv.com Monthly Newsletter Asset Management Dept. In our opinion, this bullish tone is in contrast with both the monetary and fiscal backdrops. Investors are aware that the Fed and the Central Bank of China are in a tightening mode, while the ECB may soon start debating a shift in policy stance away from easing. On the fiscal front, the optimism about the new US administration pro-growth policies has to some extent receded, while the proposed budget was criticized on the back of their draconian spending cuts. Turning to the macro-economic landscape, we are noticing a deceleration in US data. In contrast, economic figures from EU and Japan are strong and encouraging. One explanation regarding this bullish exuberance is illustrated by a decline in liquidity and market risk, epitomized by reduced risk premium and depressed levels for the VIX index, which is the volatility index or gauge of fear, coupled with declining US yields. We continue to believe that this collapse in volatility is a sign of complacency and paralysis rather than a sign of confidence. It appears that investors are still on balance, looking for some hope regarding Mr. Trump s policies in relation to deregulation, tax cuts, and infrastructure spending, despite the tug of war with the Congress and the fact that the first half of 2017 has already elapsed. On the other hand, it seems that investors still consider that while quantitative easing is in retreat, given that the Fed is considering to normalize its balance sheet, the process is not yet off the table since both the ECB and Bank of Japan are still pumping liquidity through their asset purchase programs. While this action, coupled with the unfounded hope related to Mr. Trump s growth policies in 2017 could buy investors some spare time, it cannot guarantee a long term splendid time as a market that is already near record high should not come with great expectations, and investors should face the reality of overstretched valuation in the US. In contrast, we think that the interesting trade is taking place in the currency market, as the slide in the USD, which has broken a long term upward trend, is generating inflow into markets beyond US equities, notably emerging economies and Europe which are building momentum, while oil and industrial commodities, which are inversely related to the USD, are still laggard, and yields in US are not yet seeing the inflationary power of a weak USD. In the MENA region, the recent geopolitical crisis between Qatar on one hand and Saudi Arabia and UAE on the other, is curbing the positive effect of the OPEC/non-OPEC production cut agreement reached on May 25 th, Valuation in GCC is appealing in selective sectors noting that most markets were trading near their 200-day moving average at a time where oil has found a floor, the IMF has called for less austerity measures, and Saudi Arabia is poised to join the review list for potential upgrade to MSCI Emerging Market Index. Raed Al Momani Portfolio Manager Raed.Momani@Capitalinv.com Mohammad AlZoubi, CFA Financial Analyst Mohammad.AlZoubi@Capitalinv.com Sarah Elawi Financial Analyst Sarah.Elawi@Capitalinv.com Hazem Halaseh Financial Analyst Hazem.Halaseh@Capitalinv.com For further information and to discuss possible investment opportunities, please contact: Asset Management Dept. Tel: Ext and 2373 AssetManagement@Capitalinv.com This report must be read with the disclaimer at the end of the report.

2 Clues from Recent Asset Classes Behavior Dollar Index Spot Chinese Yuan Spot vs USD The graph above shows the performance of the USD index. It peaked around January 20 th, 2017 upon Mr. Trump s inauguration, and since then it started to slide until it recently broke its long term upward trend. While this weak performance is potentially a result of the protectionism rhetoric adopted by the new US administration, it is mainly an exhibition of signs of weakness in the US economy. We are watching the performance of the USD carefully as it will have implications on other asset classes and regions which usually move inversely with the greenback. Along with the weak USD, we are keeping an eye on the Chinese Yuan, which has been remarkably stable and appreciated slightly Vis-a-Vis the USD amid a clampdown on speculative leverage in China, which means that capital outflow has receded. A stable Yuan along with a weak USD is a recipe for inflationary and cyclical trade. US 10-yr Gov. Bond Yield, % US Treasury 10-2 Year Spread, % In our opinion, US yields are showing the same pessimistic outlook regarding the US economy as the USD performance. In fact, the US 10-year yield registered a new low for 2017 at around 2.15%, reflecting weak economic data, notably unemployment figures and a pause in inflation. At the same time, the spread between the US 10-Year and 2-Year yields tightened further to reach 0.87%, which means that investors believe that the Fed s tightening of monetary policy, as indicated by the high probability of a hike in June, might slowdown the economy further amid growing doubts regarding Mr. Trump s ability to deliver on his business friendly policies. On the other hand, given the global geopolitical tensions, US treasuries along with German government bonds and the Japanese Yen hold into their flight to safety gains. Monthly Newsletter Asset Management Dept. 2

3 Gold ($ per Troy Ounce) VIX (S&P 500 Volatility) , While the VIX index is hovering around its nadir, gold prices were climbing amid geopolitical tensions and a weak USD. However, it was interesting to note that gold-related stocks like gold miners did not follow the rally in gold prices, which shows that investors are not seeing imminent inflationary risk, despite that inflation is building momentum. S&P 500 INDEX 1100 MSCI Emerging Markets Index , , In relation to equities, technology stocks were leading the market in the US, while financial stocks and small caps were laggards. Some media reports have mentioned that 2 out of 5 stocks in the S&P500 index are already trading below their 50-day moving average, which shows that the rally is reaching its limit. In contrast, it is obvious that emerging markets are building momentum and benefiting from a weaker USD; any exodus from US equity would generate inflows into Europe and emerging markets. Monthly Newsletter Asset Management Dept. 3

4 Macro: Deceleration in the US Encouraging Signs from Europe & Japan U-3 US Unemployment Rate, % Conference Board Consumer Confidence US economic data has been disappointing recently, as indicated by a weak unemployment report coupled with a drop in industrial production, home sales, and durable goods, and more importantly the sentiment index which dipped in the last survey. We are noticing more reports related to delinquencies in student loans, and more importantly in auto loans, which are generating a glut of used cars in the US. Amid a tightening Fed, this shows that private consumption based on credit expansion is reaching its limit, while the IMF has warned in its recent Global Financial Stability Report that US corporates are vulnerable to interest rate rises given their highly leveraged positions and weak interest coverage ratios. Eurostat Eurozone Unemployment Rate, % Eurozone Consumer Confidence Indicator On the other hand, and as illustrated in the graphs above and below, economic data from Japan and the EU are very encouraging. In Europe, the political risk of the populists has subsided, while purchasing managers data are coming strong and employment is moving in the right direction. Even financially troubled countries, such as Portugal and Greece, seem to be in better shape and on the way of recovery or stability. Concerning inflation, despite its recent pause, it is worth to mention that Germany s Producer Price Index was on the rise, which should soon translate into inflation for the consumer. Monthly Newsletter Asset Management Dept. 4

5 Japan Unemployment Rate (%) Producer Price Index (yoy %) In Japan, the economy registered a promising growth of 0.5% in Q1 2017, while an unemployment rate of 2.8% is showing that the job market is tight and inflationary pressure may be building, especially that Japan s Producer Price index is on the rise. The table below shows the trend in PMI data, which are leading indicators of GDP growth. Purchasing Managers Indices (PMI) ( ): Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Global Manufacturing Global Services Global Composite US Manufacturing US Services US Manuf. New Orders EU Manufacturing EU Services EU Composite China Manufacturing China Services China Manuf. New Orders * PMI reading above 50 indicates economy expansion * Red points displayed within the lines above indicate highest point in the range * Figures in green indicate acceleration from previous month, while red indicate deceleration Monthly Newsletter Asset Management Dept. 5

6 2M 4M 6M 8M 10M 1Y 14M 16M 18M 20M 22M 2Y 26M 28M 30M 32M 34M 3Y 38M 40M 42M 44M 46M 4Y 50M 52M 54M 56M 58M 5Y June 7 th, 2017 Oil: Inventories are Falling Awaiting Rebalancing Oil Future Curve On May 25 th, OPEC and Non-OPEC countries reached a deal to extend their oil output cuts by 1.8mln barrels a day for 9 extra months, until the end of March As the market was expecting a deal that includes deeper cuts for a shorter duration, the initial reaction to the news was a big drop in oil prices. However, the graphs in this section illustrate the status of oil inventory in the world. It is worth to mention that floating storage, which is the most expensive way of storing crude, has already reached a plateau and is relatively declining. Simultaneously, oil stockpiles in the US are on a declining trend for the past two months, despite an increase in US oil production. On this front, US rig count is expected to peak soon, and the US oil production is expected to level off in the next 6 months due to increasing marginal cost and refraining drillers from adding new rigs. Only the OECD inventory level is still above its 5 year average, in fact the OECD inventory should be the least affected as it is the most efficient and relatively the cheapest. In all cases, inventories are on a downward trend, the crude oil future curve is in slight backwardation, which is expected to lend support to oil prices along with a weaker USD, and a pick-up in demand due to the start of the US driving season. Global Floating Oil Inventory ('000 Barrels) 550 US Crude Oil Inventory ('000 Barrels) 205, , , , , ,000 85, , Monthly Newsletter Asset Management Dept. 6

7 OECD Oil Inventory (Million Barrels) 1,300 1,250 1,200 1,150 1,100 1,050 1, ,235 MENA: A Geopolitical Earthquake in GCC Saudi Arabia, Egypt, the United Arab Emirates, and Bahrain have cut diplomatic ties with Qatar, accusing it of destabilizing the region. In addition, the four countries decided to shut down all land, sea and airspace crossings with Qatar. Qatar s role in the Saudi-led coalition fighting against Yemeni rebels was dissolved. Moody s, a credit rating agency, said GCC rift could affect Qatar s credit quality via trade and capital flows, and would thus impact its credit outlook. FIFA, however, said that it is in regular contact with Qatar with no further comment in relation to the fate of the world cup tournament supposedly to take place in The Kuwaiti Emir is trying to mediate a solution that aims at containing the tensions and curbing any escalation. Given the rising uncertainty, the Qatari market dropped by almost 9%, while the CDS (the insurance on Qatari government bonds) jumped to 79bps from 59bps, noting that Qatar has an AA rating from S&P (Aa3 from Moody s). We hope that this regional geopolitical tension eases soon, as valuation in the region seems appealing, with most markets trading below or near their 200-day moving average. In addition, the IMF has called regional governments to relax their austerity measures, the oil prices are set to gain support from the OPEC/Non-OPEC oil output cut deal, and the MSCI is considering classifying Saudi Arabia into its emerging market index watch list, which should generate a decent inflow into Saudi Arabia s equity market. Dubai Financial Market General Index Qatar Exchange Index 3,800 3,700 3,600 3,500 3,400 3,300 3,200 3,100 3,000 3,320 11,000 10,500 10,000 9,500 9,000 8,500 8,990 Monthly Newsletter Asset Management Dept. 7

8 Major Indices Status as of end Performance Dec May May YTD (31 May. 2017) MENA Abu Dhabi 4, , % -2.62% Bahrain 1, , % 8.14% Dubai 3, , % -5.42% Egypt 12, , % 8.06% Jordan 2, , % 0.23% Kuwait 5, , % 18.05% Lebanon 1, , % -3.51% Morocco 11, , % -0.57% Oman 5, , % -6.24% Palestine % -0.40% Qatar 10, , % -5.13% Saudi Arabia 7, , % -4.70% Tunisia 5, , % 3.82% S&P Pan Arab Composite % -2.02% Dow Jones MENA % -1.77% Americas Dow Jones Industrial 19, , % 6.31% S&P 500 2, , % 7.73% NASDAQ Composite 5, , % 15.15% S&P/Toronto Composite 15, , % 0.41% Europe EURO Stoxx 50 3, , % 8.03% S&P Europe 350 Index 1, , % 7.33% FTSE 100 Index/ London 7, , % 5.28% FTSE MIB Index/ Italy 19, , % 7.78% DAX Index/ Germany 11, , % 9.88% ASIA/Pacific NIKKEI 225/ Japan 19, , % 2.81% S&P/ASX 200/ Australia 5, , % 1.04% BRIC Brazil/ Bovespa 60, , % 4.12% Russia/ RTS 1, , % -8.59% India/ Bombay Sensitive 26, , % 16.97% China/ Shanghai Composite 3, , % 0.44% Hong Kong/ Hang Seng 22, , % 16.64% Monthly Newsletter Asset Management Dept. 8

9 Description Closing Prices as of end Performance Dec May May YTD (31 May. 2017) Commodities (in USD) Brent Spot (Barrel) % -9.62% WTI Cushing Spot (Barrel) % % Natural Gas NYMEX (MMBtu) % % Gold Spot (OZ) 1, , % 10.13% Silver Spot (OZ) % 8.89% Copper LME Spot (MT) 5, , % 2.44% Iron Ore Spot Price 62% USD (MT) % % Corn CBOT Active Month (Bushel) % 2.13% Wheat CBOT Active Month (Bushel) % -1.15% Soybean CBOT Active Month (Bushel) % % Rough Rice Futures (USD/cwt) % 18.97% Currencies Spot Exchange Rates Against US Dollar Euro % 6.91% GBP % 4.46% CAD % -0.46% Yen % 5.63% CNY % 1.91% Monthly Newsletter Asset Management Dept. 9

10 Capital Investments Asset Management Dept. Tel: Ext & 2373 AssetManagement@Capitalinv.com Disclaimer The information and opinions contained in this document have been compiled in good faith from sources believed to be reliable. Capital Investments makes no warranty as to the accuracy and completeness of the information contained herein. All opinions and estimates included in this report constitute and reflect our independent judgment as of the date published on the report and are subject to change without notice. Capital Investments accepts no liability whatsoever for any loss of any kind arising out of the use of all or any part of this report. Capital Investments and its related companies may have performed or seek to perform any financial or advisory services for the companies mentioned in this report. Capital Investments, its funds, or its employees may from time to time take positions or effect transactions in the securities issued by the companies mentioned in this report.this document may not be reproduced in any form without the expressed written permission of Capital Investments. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. Prior to investing, investors should seek independent financial, tax and legal advice. Monthly Newsletter Asset Management Dept. 10