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GCC exchanges had a mixed performance with Saudi Arabia +5.4% for the week (on high volumes) on the back of the Capital Markets Authority CMA head announcing last week that the opening of the Saudi exchange to Qualified Foreign Investors was on track. For the month the Saudi Index is +6.5% with all sectors barring telecom positive. Mobily continues its free fall on poor results and lack of management clarity.

There was a broad reshuffle in the Saudi Arabian top government positions and there is a new CMA head, who has reconfirmed the opening of the Saudi market to foreigners. However oil (Brent) trading above USD 50 should keep the market stable to positive in the short term, now that the catalyst of the earnings season is over. Most of the GCC countries can withstand the impact of lower oil prices short term. Saudi Arabia has just announced a 2 month bonus for government employees, which is positive both for sentiment and for the consumer sector (Savola, Al Hokair and Jarir) that will be the beneficiary of the increased wage spend. Although budget and current account positions could slip into deficit, low debt levels and large foreign exchange reserves defer the need to reduce domestic spending.

The Qatari market was up 1.7% for the week (-3.1% for the month) but on low volumes. The large caps are in the process of paying out dividends and the only catalyst in sight is a tick up in oil (or gas) prices. UAE markets are expected to stay volatile until the earnings season is over.
GCC bank stocks have continued to hold up: this week Qatari banks led by Qatar National Bank outperformed other sectors. In Saudi Arabia Samba Bank rallied +9.1% on the back of a 3 for 2 bonus issue and higher dividend payout. Both stocks are part of our recommended holds in the GCC. UAE bank stocks too have benefited from positive earnings growth and better asset quality and high dividend and bonus payouts should provide stability to this sector.
Yield compression overseas positively affects GCC bond markets

US government bonds ended January 2015 on a very positive note; yields on 10-year Treasuries compressed from 2.17% to 1.63%, the biggest decline in any January since 1988. Investors pushed out expectations on the next rate hike, as the US Federal Reserve (Fed) confirmed patience would be used in considering when to start normalizing policy. Data pointing to deflationary threats in the US and particularly in the Eurozone also triggered support for developed market sovereign bonds. Yields on Germanys 10-year bunds and UK-10 year Gilts are at 0.30% and 1.32% respectively.
Regional bonds and Sukuks continue to benefit from yield-compression overseas and from lack of local supply. The month of January saw one transaction only in the GCC the issuance of the Dubai Islamic Bank Tier1 perpetual Sukuk. Tunisia issued USD 1 bn. of 10-year sovereign bonds at 5.875%, rated Ba3 by Moodys and BB- by Fitch. As mentioned in January this year, Qatar redeemed a USD 3.5 bn. bond which matured on 20 January 2015. News of a possible debt transaction by Bank of Bahrain and Kuwait (BBK) spread last week, as one of its bonds matures in October 2015. BBK rarely issues debt, which should therefore be well-bid.

Russia was downgraded by S&P to junk status. Two Russia-related events took investors by surprise: an unexpected 200 bps. rate cut by the Central Bank of Russia and sanctions, which were forced on individuals only, rather than on companies.

Reliance Industries our latest Indian conviction trade priced its 10 year bond at 4.125%, which currently trades just shy of 4%. We expect this bond to remain well bid. For further information please contact your relationship manager.

US earnings and Greece exit make investors jittery
Global equity markets remain range-bound and volatile, as the news-flow seems to become increasingly negative in the short term. Major equity benchmarks lost ground for the week, both in developed and in emerging countries.
The US economy expanded less than forecast in the last quarter of 2015 and earnings of US companies for the same quarter are expected to show no growth, mainly due to lower capital expenditure in the energy sector and a stronger dollar weighing on exports. The S&P500 fell 3.1% in January on the back of this. Deflationary pressures in the US and in particular in the Eurozone (where the consumer price index recorded a dreadful -0.6%) are mounting, in spite of easy monetary policies, because of the slump in crude prices. Investors are also becoming jittery about the defiant attitude of the new Greek government, which could lead to the withdrawal of financial support by European institutions and to contagion effects. Greek 10 year bond yields rose 276 basis points to 11.17% on the back of this, the biggest weekly increase since May 2012. Greek equities also fell sharply, the benchmark index (ASE) falling 14% as banks in particular sold off.

We continue to hold the view that the backdrop for risk assets remains constructive, although short-term uncertainties may take their toll and spark volatility bouts.

The Federal Reserve Board, after its policy meeting held last week, described the expansion as "solid" and mentioned a strong labor market. James Bullard, a renowned local Fed President, said the economy has "a lot of momentum", driven by the falling unemployment. These statements have a forward-looking bias and should reassure investors. As for the Eurozone, December data confirm a robust expansion in money supply, which usually leads economic indicators by roughly 6 months, and show the first yearly growth in bank lending to the private sector.

Forecasts of crude prices have again been revised down for 2015 amidst a persistent glut and are expected to remain at around USD65 per barrel (Brent). Consumers in the US, in Europe and in Japan should thus spend more as the positive effects from this repricing feed through the economy. All of the countries in Emerging Asia ex Japan, with the exception of Malaysia, are net crude importers and will benefit as well.
Low bond yields represent one more tailwind for global equities. In developed markets the "zero rate policy" implemented by central banks has crushed yields and made equities quite inexpensive versus government bonds. The "open ended" Quantitative Easing (QE) by the ECB means that liquidity injections are likely to be extended over time.

Overall we see positive momentum in equities resuming when the newsflow on US earnings has been fully discounted and the newly-elected Greek leaders soften their stance on the bailout terms. Despite this continued volatility, investors are advised to hold diversified portfolios and add to equities on market weakness. Currently we prefer European and Japanese equity markets, supported by high liquidity, unchallenged valuations and favourable crude oil dynamics. Globally consumer discretionary stocks have more potential for outperformance, since they are most sensitive to trends in oil prices.
Central banks have not lost the art of surprise with rate cuts

The FOMC statement this week was largely in line with expectations, maintaining the view that the Fed can be patient in beginning to normalize the stance of monetary policy. However, the Reserve Bank of New Zealand (RBNZ) surprised markets by completely removing their hawkish bias. Monetary divergence continues to dominate foreign exchange markets and the fundamental case for a stronger dollar remains largely in place. USD traded was mixed for the week; stronger against commodity currencies AUD, NZD & CAD while it was a slightly weaker against EUR, GBP and JPY. In the near term we expect further USD weakness against EUR as well as JPY.

Spot Gold had the best month in the last three years rising almost 8% in Jan after SNBs decision to scrap the CHF peg, as well as QE from the ECB. Prices should remain supported in the near term due to uncertainty over Greece.
The slowdown in U.S. oil drilling abruptly intensified last week as oil companies idled nearly 100 rigs, the biggest drop on record, which helped fuel an 8 percent surge in oil prices. We do expect prices to be squeezed up further squeeze up in the short term.

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