capital investments asset management june 5 2014 monthly newsletter

8/12/2019 Capital Investments Asset Management June 5 2014 Monthly Newsletter

1/13

Monthly Newsletter

Introduction

Geopolitics dominated the scene over the past month. Turmoil continued in Ukraine

amid a presidential election and a separation referendum in the eastern part of the

country. Russia (Gazprom) and China (CNPC) signed a USD 400bn historic gas deal albeit

an explosion in the restive Chinese province of XinJiang and skirmish in South China Seabetween Vietnam and China over disputed oil rich water zone. In Thailand martial laws

are in action while through the democratic process of election anti-EU parties claimed

almost 25% of the European parliament seats. Simultaneously, troubled Egypt and Syria

are seeking decisive presidential elections through democratic processes as well. Despite

a hot relation between Iran and GCC countries the love started to spread more equally as

the season of visits to Iran is not restricted to Omani officials as epitomized by the

remarkable visit of Kuwaits Emir to Tehran. As for Qatar whose political tensions with its

GCC neighbors have not cooled yet, is subject again, amid denying wrongdoing, to some

investigations regarding its hosting of the 2022 FIFA World Cup.

Without ruling out the significant repercussions and implications of geopolitical risks; the

investment dilemma between bonds and equities continues to puzzle investors. As stocks

seem to be pricing in a recovery, it may not be logical for the bond market to

simultaneously price in accelerating deflation and deceleration in the global economy.

For instance, the flight to risk against a backdrop of weakening growth albeit in a volatile

manner was justified in our opinion by idiosyncratic factors in the absence of a broad

based market move. In emerging economies as credit default swaps (CDS) levels were

stable; markets were reacting to election optimism in some part (India) and to political

issues in the other (Russia). In the Middle East, the markets of Qatar and UAE were

responding to MSCI index inclusion while in advanced economies, markets moved

sideways in response to data releases without ignoring the pockets of overvaluation in

some sectors.

As for the bond market, there is first a thirst for income around the world in a low

interest rate environment, in addition deflationary pressures are making real yields

attractive while all the economic optimism diffused since the last quarter of 2013 was

not yet confirmed by a hesitant set of data that is neither very good nor very bad to

upset either the bonds or equities investors.

Besides understanding the drivers behind the recent behavior of equities and bonds it is

worth to focus on the big picture and global structural changes in setting asset allocation

as like old time travelers we need to know where is north to set direction.

In this context, asset managers shall be able to maneuver dynamically in a transitory

period that would take them hopefully from liquidity driven to growth driven markets. In

the era of Tapering (monetary policy withdrawal) and in case central banks dont

reverse course we need to see corporate investment in action, increased employment

and a self- sustaining economic momentum that does not require continued stimulus

which is not a high probable scenario in our opinion given the absence of synchronized

growth globally. We believe that liquidity can take you so far but fundamentals should

set the final destination.

For further information and to

discuss possible investment

opportunities, please contact:

Asset Management Dept.

Tel: +962 6 5200330

Ext. 494 and 832

[email protected]

MonthlyNewsletterAssetM

anagementDept.

Asset Management Dept. | Monthly Newsletter

Statistics are no substitute for judgment-Henry Clay

You can measure a man by the opposition it takes to discourage him-Robert C. Savage

Monetary Policy and Macro DataIntersection

Asset Classes a Mixed BehaviorWhich One is Mistaken?

MENAAwaiting Q2 results

June 5t

, 2014

Asset Management Team:

Wassim Jomaa, CFA

VP, Head of Asset [email protected]

Aiat Al Hunaiti

AVP, Portfolio [email protected]

Sareen Aynedjian

Senior Financial [email protected]

Raed Al Momani

Senior Financial [email protected]

Ramzi Mahmoud

[email protected]

Qasem Bilbeisi

[email protected]

This report must be read with the

disclaimer at the end of the

re ort.
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Monthly Newsletter | Asset Management Dept. 3

June 5th

, 2014

It is obvious that mortgage rates came down recently to level seen one year ago only on the back of

decline in US treasury yields as a result the Fed will not disturb in our opinion the recovery in the

housing market as it is considered a cornerstone in the net worth of the US consumer.

Moving to the labor market, while there is an improvement in the jobless rate and jobless claims,

we notice that the number of average weekly working hours was stable over the past year which

means there is still slack in the job market.

4.30

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0 Mortgage Bankers 30 Year Effective Rate, %

33.7

32.9

33.9

34.9

35.9

36.9

37.9

38.9

39.9US Average Working Weekly Hours

All Employees Total Private

6.3

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

7.6 US Unemployment Rate, %

300

290

300

310

320

330

340

350

360

370

380 US Initial Jobless Claims (Thousands)

Source: Bloomberg, Capital Investments

Despite improvement in the labor market the

number of hours worked is moving in a range

channel which means that despite jobs creation

working hours did not increase

Mortgage rates have adjusted upward since the

Fed started to talk about tapering in May 2013and then they drifted downward this year along

with treasury yields.


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June 5th

, 2014

Moreover coupling the data on housing and employment with the recent drop in consumer

spending and confidence we can get an indication that the outlook is sluggish till now for Q2 2014,

especially if we would like to consider that the GDP contraction of -1% that occurred in Q1 2014 is

attributed solely to weather effect.

Moving to Japan, the Bank of Japan has signaled clearly that it is not increasing its monetary

stimulus despite a fall in retail sales and industrial production as inflation figure soared to 3.4%. The

deceleration in Japan was on the back of the hike in sales tax which took effect in April coupled

with an appreciation of the Yen that affected exporters. We think that the Bank of Japan will keep

monitoring inflation figures before deciding to re-launch a new round of monetary easing to curb

the slowdown.

In the Eurozone, ECBs president Mario Draghi hinted at various occasions that the ECB is

comfortable to act on next meeting on June 5th

as he warns of threat to Eurozone recovery from a

pernicious negative spiral of low inflation. The forex market as epitomized by the Euro behavior is

81.9

71

73

75

77

7981

83

85

87 US University of Michigan Survey of

Consumer Confidence Sentiment

-0.1-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2 US Personal Consumption

Expenditures MoM, %

3.4

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0 Japan CPI YOY, %

-4.4-4.5

-2.5

-0.5

1.5

3.5

5.5

7.5

9.5

11.5

13.5 Japan Retail Sales YOY Change, %

-0.3

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0 Eurozone Industrial Production

MOM Change, %

0.5

0.0

0.2

0.4

0.6

0.81.0

1.2

1.4

1.6

1.8 Eurozone Inflation Rate, %



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June 5th

, 2014

already expecting further easing, however if the decision to ease was not beyond the current

expectations of lowering interest rate and easing lending standard to SMEs it may fail to inject

positive shock into markets.

On a separate note we think that the deterioration in the German business confidence is a

reflection of the global rebalancing that is taking place at the moment. We think that as emerging

economies growth led by China is decelerating, exports of capital goods to these markets by

German producers is going to be affected. In the coming years current accounts surplus/deficit to

GDP would be key figures to monitor to understand the world economic transition.

On the other hand, the Chinese economy faced further slowdown in Q2 on the back of deceleration

in industrial output, retail sales and a rise in bad loans for the 10th

straight quarter coupled with a

slowing growth in industrial profits.

While adapting to the new normal in terms of growth pace, the Chinese authorities are taking few

steps to smooth the slowdown and which may give some stimulus to both the local and global

economies over the coming few months.

For instance, the Chinese central bank will cut the reserve rate requirement for few qualified banks

to extend credit to SMEs and instructed the 15 biggest lenders to accelerate the granting of

mortgages to first buyers while monitoring credit risk. At the same time, the Chinese government

allowed some cities and provinces to sell municipal bonds in order to curb the growth in informal

shadow banking industry. The series of graphs presented here indicates that China may move into

a stabilization mode and may pull the world growth over the coming quarters. For instance, the

Yuan recent depreciation coupled with a decline in interest rate and resumption in growth in

1.36

1.27

1.29

1.31

1.33

1.35

1.37

1.39

1.41 EURO Index

33.130

35

40

45

50

55

60

65ZEW Germany Expectation

of Economic Growth

3.4

3.0

3.5

4.0

4.5

5.0

5.5 China Interest Rate Swap (7D Repo) 1yr, %

6.25

6.04

6.09

6.14

6.19

6.24

6.29 Chinese Yuan Spot Vs USD


The price of 1 USD in Yuan has

been depreciating since the

beginning of the year


6/13


June 5th

, 2014

money supply in addition to an uptick in manufacturing PMIs are all signals that the Chinese

authorities are putting on some grease to boost the economic engine.

China HSBC manufacturing PMI reading for May is 49.4 up from 48.1 in April, however still under

the threshold of 50 which indicates economy expansion. Simultaneously, the recently released

HSBC service PMI decelerated to 50.7 in May from 51.4 in April. It is worth to note the divergence

between Chinese official PMI data and those of HSBC as the latter reflect the situation at the level

of small and medium sized enterprises and is more representative of the broad economy while the

former (official) is more descriptive of state owned enterprises

The table below illustrates the developments in major PMIs figures around the world and point to a

possible pick-up if the trend continues:

13.2

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0 China Money Supply M2, YoY %

50.8

49

50

51

52 China Manufacturing PMI- Official

May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

Global Manufacturing 50.4 50.6 51.5 51.6 51.9 52.9 52.9 53.0 53.2 52.4 51.9 52.2

US Manufacturing 52.5 54.9 56.3 56.0 56.6 57.0 56.5 51.3 53.2 53.7 54.9 55.4

US Se rvi ce s 53.4 55.9 57.9 54.5 55.1 54.1 53.0 54.0 51.6 53.1 55.2 56.3

US Manuf. New Orders 55.7 59.1 63.6 61.3 61.3 63.4 64.4 51.2 54.5 55.1 55.1 56.9

EU Manufacturing 48.8 50.3 51.4 51.1 51.3 51.6 52.7 54.0 53.2 53.0 53.4 52.2

EU Se rvi ce s 48.3 49.8 50.7 52.2 51.6 51.2 51.0 51.6 52.6 52.2 53.1 53.2

EU Co mp os i te 48.7 50.5 51.5 52.2 51.9 51.7 52.1 52.9 53.3 53.1 54.0 53.5

China Manufacturing 50.1 50.3 51.0 51.1 51.4 51.4 51.0 50.5 50.2 50.3 50.4 50.8

Ch in a Servi ce s 53.9 54.1 53.9 55.4 56.3 56.0 54.6 53.4 55.0 54.5 54.8 55.5

China Manuf. New Orders 50.4 50.6 52.4 52.8 52.5 52.3 52.0 50.9 50.5 50.6 51.2 52.3

Purchasing Managers Indices (PMI) (2013-2014):

* PMI reading above 50 i ndicates 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 indi cate deceleration



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June 5th

, 2014

Asset Classes a Mixed BehaviorWhich One is Mistaken?

Yields on fixed income in general and on treasury bonds in the US and EU in particular were

following a downward trend on the back of muted economic growth and deflationary pressure.

The divergence in performance between the S&P 500 the Russell 2000 index which is biased

toward small cap companies shows that there is some pockets of overvaluation in the market

coupled with weakness in the economy as we elaborated in the previous section.

The recovery or the pick- up in equities occurred after the 20th

of May on the back of a series of

slightly positive data released coupled with expectation about further easing from the ECB and

amid a statement from President Putin confirming that Russia will acknowledge the results of the

Ukrainian presidential election which eased political tension. Despite all this optimism, expansion

in yields continued to be muted as illustrated by the graphs above.

2.56

2.40

2.45

2.50

2.55

2.60

2.65

2.70

2.752.80

2.85 US Treasury 10 Year Yield, %

1.41

1.29

1.34

1.39

1.44

1.49

1.54

1.59

1.64 Germany 10-yr Govt. Bond Yield, %

1,925

1800

1820

1840

1860

1880

1900

1920

1940 S&P 500 Index

1,129

1,090

1,110

1,130

1,150

1,170

1,190

1,210 Russell 2000 Index



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June 5th

, 2014

In GCC the, the strong bull market rally that started since last year got tested several times this year

with the most acute one over the past two months as indicated by the volatile behavior of the

equity markets in UAE and Qatar. The markets in the region were at a tug of war between

fundamentals and liquidity flows on the back of MSCI index inclusion for UAE and Qatar. Wecontinue to believe in the macro story of the region but pockets of overvaluation are undeniable

which explains the recent volatile pattern

Despite low yields and geopolitical risks, the price of gold continued to fall reflecting continuous

deflationary pressure and muted economic growth while the price of iron ore along with other

industrial metal will confirm to investors whether the momentum in the Chinese economy is

gaining ground after the mini-stimulus measures taken early this month and illustrated in the

previous section.

In conclusion, we think that the bond market is offering a better explanation for the investmentand economic outlook along with commodities while equities which are flying on momentum and

liquidity will face reality in terms of macro and micro (earnings) fundamentals to set direction

either through a broad market move or by experiencing the burst of overvaluation pockets as we

witnessed with the Russell 2000 index and other emerging market indices.

5,073

4500

4600

4700

4800

4900

50005100

5200

5300

5400

5500 Dubai Financial Market General Index

13,221

11,800

12,000

12,200

12,400

12,600

12,80013,000

13,200

13,400

13,600

13,800 Qatar Exchange Index

1246

1240

12501260

1270

1280

1290

1300

1310

1320

1330

1340 Gold ($ per Troy Ounce)

92.1

90

95

100

105

110

115

120

125China Import Iron Ore

Spot Price (USD/MT)



9/13


June 5th

, 2014

MENAAwaiting Q2 results

In the MENA region, the election of the army chief Abdel Fatah Al Sisi and of incumbent Bashar Al

Assad as presidents for Egypt and Syria respectively in a relatively peaceful manner along with thevisit of the Kuwaiti Emir to Tehran was the main highlights due to their futuristic implications on

the region. More importantly, in terms of geopolitical indication was the clear support from Saudi

Arabia to Egyptsnewly elected regime politically and economically through a donor conference.

Another important subject was the re-emergence of investigations in relation to potential

corruption case regarding Qatar hosting of the FIFA 2022 World Cup. The uncertainty surrounding

this issue generated a fall in most Qatari equity prices. Due to the high vagueness and tensions of

the subject we are monitoring the situation closely to assess potential risks. In addition, we are

taking into consideration the cases different investment dimensions; on the one hand, momentum

for Qatari equities is going to be impacted either negatively or positively depending on the

outcome of the investigation and on the other we are aware that Qatar has a strong macro

fundamental case beyond the preparation of the world cup event including a healthy publicbalance sheet and an ambitious infrastructure spending program of around USD 200bn to match

the government vision for 2030 in terms of ports, airports facilities in addition to roads and railway

networks not to mention utilities, real estate developments and oil and gas projects. Long term

investors in the Qatari case shall accept bumps in momentum and shall have ability to weather

volatility.

On a separate note, after a strong bull market that was tested several times during this year,

investors in the MENA region are looking for Q2 results to act accordingly. We believe that regional

markets and GCC in particular are trading at rich valuations in general despite the long term

favorable macro picture in terms of infrastructure spending. We have mentioned in our previous

newsletter that due to this situation we opted not to take all GCC markets as one concept and we

focused on bottom up research coupled with investment theme identification.

As such, we are being cautious and dynamic in our investment approach. For instance looking at

Saudi Arabia we are still trying to navigate through the repercussions of the illegal workers crack

down which is still affecting various segments of the economy including, construction, building

material, banking and retail sectors to some extent. In this context, we are trying to identify where

the spending and demand are heading over the short to medium term while focusing on companies

with earning powers and economies of scale and in times of deceleration or shifts the one with

scale and competitive advantage would prevail.

For instance, the banking sector did not experience so far a strong growth in terms of loan volume

while cement sales where following a declining pattern except for selective names, the telecoms

which enjoy healthy free-cash flow have wounded each other with price war over data package

bundles. We opted to include the graphs below which shows the development in point of sale data

and cash withdrawal over the past years to better illustrate the structural shift that is taking place

in the Saudi economy and which necessitate a change in approach toward asset allocation while

taking into consideration the future positive impact of economic reforms on the long run and the

significant liquidity in the system as indicated by the level of oversubscription in IPOs over the short

run.


10/13


June 5th

, 2014

In 2011 the Saudi King launched a stimulus package worth of USD 135 bn including many measures

that aimed at boosting disposable income in the country which explains the shoot up in point of sale

data and the optimism that accompanied it

12%

0%

10%

20%

30%

40%

50%

60%

70%

Jan

April

July

Oct

Jan

April

July

Oct

Jan

April

July

Oct

Jan

April

2011 2012 2013 2014

Point of Sales Y-o-Y58%

7%

25%

12%

0%

10%

20%

30%

40%

50%

60%

70%

2011 2012 2013 2014

April POS Growth Y-o-Y

8%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Jan

A

pril

July

Oct

Jan

A

pril

July

Oct

Jan

A

pril

July

Oct

Jan r

il

2011 2012 2013 2014

Cash Withdrawals Y-o-Y49%

-12%

7% 8%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014

April Cash Withdrawals Growth Y-o-Y

Source: SAMA, Capital Investments


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June 5th

, 2014

Major Indices Status as of end Performance

Dec. 2013 May 2014 May 2014 YTD (31 May 2014)

MENA

Abu Dhabi 4,290.30 5,253.41 4.14% 22.45%

Bahrain 1,248.86 1,459.34 2.24% 16.85%

Dubai 3,369.81 5,087.47 0.56% 50.97%

Egypt 6,782.84 8,242.94 -0.16% 21.53%

Jordan 2,065.83 2,130.92 0.32% 3.15%

Kuwait 7,549.52 7,291.09 -1.57% -3.42%

Lebanon 1,150.10 1,220.63 1.31% 6.13%

Morocco 9,114.14 9,494.79 0.24% 4.18%

Oman 6,834.56 6,857.43 1.94% 0.33%

Palestine 541.45 523.07 0.82% -3.39%

Qatar 10,379.59 13,694.19 8.02% 31.93%

Saudi Arabia 8,535.60 9,823.40 2.48% 15.09%

Tunisia 4,381.32 4,537.54 1.11% 3.57%S&P Pan Arab Composite 806.37 936.55 2.76% 16.14%

Dow Jones MENA 598.54 698.59 2.75% 16.72%

Americas

Dow Jones Industrial 16,576.66 16,717.17 0.82% 0.85%

S&P 500 1,848.36 1,923.57 2.10% 4.07%

NASDAQ Composite 4,176.59 4,242.62 3.11% 1.58%

S&P/Toronto Composite 13,621.55 14,604.16 -0.33% 7.21%

Europe

EURO Stoxx 50 3,109.00 3,244.60 1.44% 4.36%

S&P Europe 350 Index 1,338.51 1,408.11 1.88% 5.20%

FTSE 100 Index/ London 6,749.09 6,844.51 0.95% 1.41%

FTSE MIB Index/ Italy 18,967.71 21,629.71 -0.71% 14.03%

DAX Index/ Germany 9,552.16 9,943.27 3.54% 4.09%

ASIA/Pacific

NIKKEI 225/ Japan 16,291.31 14,632.38 2.29% -10.18%

S&P/ASX 200/ Australia 5,352.21 5,492.55 0.06% 2.62%

BRIC

Brazil/ Bovespa 51,507.16 51,239.34 -0.75% -0.52%

Russia/ RTS 1,442.73 1,295.75 12.12% -10.19%

India/ Bombay Sensitive 21,170.68 24,217.34 8.03% 14.39%

China/ Shanghai Composite 2,115.98 2,039.21 0.63% -3.63%

Hong Kong/ Hang Seng 23,306.39 23,081.65 4.28% -0.96%



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June 5th

, 2014

Description Closing Prices as of end Performance

Dec. 2013 May 2014 May 2014 YTD (31 May 2014)

Commodities (in USD)

Brent Spot (Barrel) 110.82 110.66 1.85% -0.14%

WTI Cushing Spot (Barrel) 98.42 102.71 2.98% 4.36%

Natural Gas NYMEX (MMBtu) 4.15 4.54 -6.22% 9.58%

Gold Spot (OZ) 1,205.65 1,249.73 -3.24% 3.66%

Silver Spot (OZ) 19.47 18.82 -2.00% -3.35%

Copper LME Spot (MT) 7,375.75 6,919.00 3.90% -6.19%

Iron Ore 62%F (Metric Tonnes) 134.20 91.80 -12.90% -31.59%

Corn CBOT Active Month (Bushel) 4.37 4.66 -10.26% 6.58%

Wheat CBOT Active Month (Bushel) 6.17 6.27 -13.06% 1.70%

Soybean CBOT Active Month (Bushel) 12.65 14.93 -1.29% 18.09%

Rough Rice CBOT Active Month (per cwt = 100 lb) 15.29 14.99 -3.66% -1.96%

Currencies Spot Exchange Rates Against US Dollar

Euro 1.3743 1.3635 -1.67% -0.79%

GBP 1.6557 1.6755 -0.70% 1.20%

CAD 0.9414 0.9221 1.07% -2.05%

Yen 0.0095 0.0098 0.45% 3.45%

CNY 0.1651 0.1601 0.20% -3.07%


600

800

1000

1200

1400

1600

1800

2000

2200

2400

2600 Baltic Dry Index

The Baltic Dry Index tracks worldwide international

shipping prices of various dry bulk cargoes. It

provides an assessment of the price of moving the

major raw materials by sea. Recently showing

demand in emerging markets.



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capital investments asset management june 5 2014 monthly newsletter

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