Aditya Pugalia - Director, Financial Markets Research
Published Date: 24 June 2018
Global equities closed lower as the focus shifted onto the ongoing trade war between the US and other countries. With neither side showing any signs of any imminent thaw, investors started to recalibrate their positions. A reasonable outcome from the OPEC meeting did help to assuage some concerns over the trajectory of oil prices which in turn provided support to broader equities. The MSCI World index dropped -0.9% on the back of weakness across its sub-indices. The MSCI G7 index, the MSCI EM index and the MSCI Frontier Markets index declined -1.0% 5d, -2.3% 5d and -0.8% 5d respectively. Volatility increased across the board with the VIX index, the V2X index and the CBOE EM ETF Volatility index rising +14.9% 5d, +17.11% 5d and +9.2% 5d respectively.
The focus this week will firmly be on how risks around global trade evolves. Regionally, investors will be keenly watching the follow-through impact of the MSCI’s decision to upgrade Saudi Arabian equities to EM status and its impact on the broad region.
Chart of the week
The focus this week will be on the result of presidential and parliamentary elections in Turkey. Ahead of the results, the Turkish stock index 60-day volatility has climbed to a 20-month high. It is worth noting here that the Borsa Istanbul 100 index is currently trading at 6.8x 12-month forward earnings implying a significant discount to the MSCI EM index which is trading at 11.3x 12-month forward earnings.
It was a truncated week of trading for GCC equities. The week was dominated by MSCI announcement that they will be including Saudi Arabian equities in their emerging market index and also consider Kuwait for a potential upgrade to emerging market status next year. The S&P Pan Arab Composite index dropped -1.2% w-o-w.
The upgrade for Saudi Arabia is an important milestone in evolution of its capital markets. We have highlighted the same in our note released last week. (Read here)
The index added +0.5% following the announcement from the MSCI. It is imperative to note here that the move was widely anticipated and hence it will not be surprising to see a more measured reaction to the move.
UAE bourses closed lower with the DFM index and the ADX index dropping -3.6% w-o-w and -3.8% w-o-w respectively. Air Arabia dropped -11.5% w-o-w on above average volumes after the company revealed an exposure of USD 336mn to funds managed by Abraaj Group. The total exposure equates to 9.6% of company’s total assets at the end of Q1 2018. The company on its part has said that the exposure will have no significant impact on its daily operations and that it has formed a team of executive to safeguard its investment. For the record, Abraaj last week filed for a court-supervised restructuring.
Developed market equities closed lower as fears of a prolonged trade war took center stage. Neither the US President Donald Trump nor other countries are showing any signs of a near-term thaw as both sides continue to announce and implement tit-for-tat tariffs. The broader equity indices did receive some boost from energy sector stocks towards the end of the week as OPEC’s decision to boost output led oil prices higher on interpretation that the output increase is lower than earlier feared. Eventually, the S&P 500 index, the Euro Stoxx 600 index and the Nikkei index ended the week with losses of -0.9% 5d, -1.1% 5d and -1.5% 5d respectively.
Emerging market equities underperformed wider equity markets. The MSCI EM index dropped -2.3% 5d compared to a decline of -0.9% 5d in the MSCI World index. China’s Shanghai Composite index was among the worst performer with losses of -5.1% 5d. The index closed at its lowest level since June 2016 as concerns over the impact of trade tension with the US and mixed economic data forced investors to pare positions.
According to market data, outflows from emerging markets accelerated last week with USD 5.6bn flowing out. Nearly 71% of the outflows were driven by ETFs and the rest from mutual funds.
Turkish GDP slows in Q2
US posts further job market gains
Global equities closed lower
US trade deficit widens to five-month high