Trade war, geopolitical jitters weighed on world economic sentiment in 2018

Kuwait’s economic fundamentals remain strong

GCC nations continue efforts to shift reliance from oil revenue to non-oil revenue resources.

KUWAIT: Kuwait Finance and Investment Company (KFIC) released its report for December 2018 which discusses the status of local and international markets.

International economic overview:
International economic sentiment has weakened throughout 2018 mainly due to trade war tensions, geopolitical tensions, implications of Brexit, and oversupply in oil markets. Moreover, strength in the USD continues to place pressure on debt heavy emerging market economies.

According to Oxford Economics, World GDP is expected to fall to +2.76 percent in 2019 from +3.02 percent in 2018. The biggest risks are a rise in trade protectionism, as elevated trade wars and protectionism between US and China has resulted to large downside risk to global growth expectations. Concerns surrounding trade tensions and tariffs has also disrupted global supply chains. In addition, Global Manufacturing PMI level readings are at their lowest level since November 2016 as it is currently hovering near 52.0 and has declined from 54.0 from the beginning of 2018. Most recently, China’s PMI fell below 50 for the first time in nearly two years as the world’s second largest economy falls into a bear market. In Europe, the political turmoil between the EU and UK could ignite a crisis in business confidence as Brexit negotiations remain underway.

GCC Economic Overview
GCC nations endured mixed economic highlights during the year as efforts remain underway to shift from oil revenue reliance to non-oil revenue sources. Saudi Arabia is set to adopt an expansionary policy heading into 2019 as spending is set to increase by +7 percent YoY with projected expenditure amounting to SAR 1.1 trillion. Revenues are set to grow by +9 percent YoY to SAR 975bn, driven primarily by substantial growth in non-oil revenues such as VAT and higher expat levies. Spending in KSA is mostly driven by capital expenditures, which is set to rise to SAR 246 billion and represents a +20 percent increase as compared to 2018.
The 2019 budget focuses mostly on investments in infrastructure and entertainment industries and policies to support the private sector in tourism and helps empower Small to Medium Enterprises (SMEs). KSA has scaled down significantly on Military and Educational services. In addition, MSCI EM upgrade is underway as of June 2019 and anticipated FTSE inclusion as of March 2019. In Kuwait, the economic fundamentals remain the strong in the region and government regulations and economic policies suggest an expansionary tone.

Kuwait has also been included in the latest FTSE EM upgrade which is a positive impetus mostly for Kuwaiti banks. Kuwait is also being considered for MSCI in the 2019 annual market classification review as of June 2019, which could potentially reclassify it from Frontiers Market to Emerging Market status and possibly attract more than $1 billion in foreign inflows. In UAE, VAT contributed more than AED 12 billion to revenues in 2018 as the emphasis remains to boost non-oil income and narrow the budget deficit. UAE real estate property prices also tumbled in 2018 as prices fell by -5.8 percent on a yearly basis. The real estate market has been plagued with being oversupplied, weak demand, and implications of VAT on disposable income. In Qatar, the country revoked foreign ownership limits as it allowed foreigners to own 100 percent of businesses in all economic sectors. The gas-rich country remained resilient to the GCC blockade and has maintained strong economic performance throughout 2018 due to healthy fiscal reserves. In Oman, the country remains on road to recovery as GDP forecasts point towards higher growth in 2019. The ministry of tourism has stated that contribution of tourism to GDP will rise to 10 percent in 2019 from 6 percent in 2018. Bahrain remains the most vulnerable out of all GCC states as the country has the highest leverage among peer groups with a Debt to GDP ratio of 90 percent (vs World Debt to GDP of 60 percent).

Markets overview
International markets ended the year in bearish territory due to weaker global growth trajectory, trade war tensions, and uncertainty in corporate earnings guidance as the MSCI World index fell -10.0 percent year to date (YTD). China’s Shanghai’s index was the worst performing global market as compared to the other heavyweight world indices. In the US, the S&P 500 declined by -6 percent as investors have been worried by trade protectionism policies with China, an potential yield curve inversion, and weaker global growth sentiment.

Federal Reserve chairman Jerome Powell has stated that the outlook for the US economy remains “solid” and interest rates are just below the neutral range, suggesting that there will be less anticipated interest rate hikes in 2019 and beyond. In Europe, Germany’s DAX dropped by -18 percent as PMI data continued to disappointed analysts and manufacturing data has been dragged lower by time-consuming car emissions examinations. France’s CAC 40 fell by -11 percent as political concerns continued to overshadow European markets after the European Central Bank (ECB) rejected the Italian government’s budget plan and ask for revisions to be made to the fiscal targets.

UK’s FTSE 100 fell -12 percent as investors are awaiting to see if British lawmakers will decide to accept prime minister May’s plans for a “soft” exit and keep relatively close economic ties with the EU, or to reject it completely in favor of a “hard” Brexit. The final decision is set to be made on March 29. In China, Shanghai Composite fell by -20 percent in 2019 as trade war tensions intensified as Donald Trump has proposed to place up to 25 percent tariffs on import goods worth up to $500 billion. China has stated that they are ready to retaliate, and no deal has been agreed upon yet. In Japan, Nikkei 225 fell by -17 percent as it entered bear market territory for the year. The equity markets are pricing in concerns over a slowdown in the global economy and a downward revision to corporate earnings in advance. Japanese stocks have been caught in a global market bear market, mainly driven by concerns about everything from the US China trade war to global central banks’ moves to tighten monetary policy.

Sentiment has significantly weakened, with foreign investors selling billions of dollars in the country’s shares. In commodities, oil prices retraced as Brent dropped by -19.2 percent to close at $54.3 bb/l and WTI fell by -24.3 percent to close at $45.4 bb/l. There have been concerns over a global supply glut as US has become the world leader in oil production, overtaking Saudi Arabia and Russia to produce more than 11 million bpd. US trade war tensions has also led to concerns that global demand will fall as corporate earnings could stall. OPEC is currently in efforts to reduce the global supply glut as 1.5mn bpd have been removed from the market since December 2018.

Regional indices as measured by the MSCI GCC IMI index increased by 9.37 percent YTD. Saudi Arabia’s Tadawul index gained +8.31 percent YTD to close at 7,826.7 mainly driven by the strong performance in the Financial Services sector. Banks rose +31.1 percent on a YTD basis, followed by Media +31.0 percent and Telecommunication Services +27.1 percent.
Kuwait’s All Share Market gained +5.2 percent YTD to close at 5,079 with strong performance coming mostly from the Banking and Oil & Gas sectors. In UAE, Dubai’s DFM index fell by -24.93 percent YTD with all sectors experiencing weakness. Investment & Financial Services fell by -43.9 percent, followed by Real Estate ?-38.9 percent and Services -24.1 percent. In Abu Dhabi, the ADSMI index was the second top performing GCC regional index as it gained +11.75 percent.

Positive returns came mostly from Banks +26.8 percent, Energy +16.0 percent and Financial Services & Investment +5.0 percent. Negative returns in Real Estate were witnessed throughout the UAE as the sector fell -28.3 percent in Abu Dhabi. In Qatar, the QE All Share index was the best performing GCC index as it gained +25.6 percent YTD as Qatar stepped up efforts to remove foreign ownership limits for all economic sectors.
Banks & Financial Services were the main beneficiaries as they gained +42.8 percent, followed by Consumer +36.1 percent and Industrials +22.7 percent. Oman’s MSM 30 index fell ?-15.2 percent with negative performance coming from Industrials -26.9 percent, Services -13.4 percent, and Banking -8.7 percent. In Bahrain, the BSE index closed flat at +0.4 percent with positive performance from Services +6.4 percent which was offset by negative performance from Hotels & Tourism -7.7 percent. Note: Sources– KFIC Research, Bloomberg, Reuters, GulfNews, KUNA, JPM Chase, S&P, IMF, Oxford Economics.

KFIC Equity Markets Annual Review

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