7 July 2013
Head of MENA Equity Research+971 4 230 email@example.com
Analyst+971 4 230 firstname.lastname@example.org
The MSCI World index rose +1.1% 5d, as US payrolls data came in higher thanexpected, and in Europe, both the European Central Bank and Bank of Englandsignaled that interest rates will continue to remain low in the Eurozone for an extendedperiod of time. Risk measures declined in the US and Asia, with the VIX SPX -11.7% 5dto 15 and the VHSI +12.9% 5d to 23, but increased in Europe with the VSTOXX +3.6%5d to 23. The MSCI G7 index, +1.3% 5d, led gains for the MSCI market indices,followed by the MSCI Frontiers Markets index, +1.1% 5d whilst the MSCI EmergingMarket index declined -2.4% 5d.Investors are expected to focus on Q2 2013 earnings releases over the coming weeks,and more importantly management guidance, to help gauge the impact of the expectedreduction in US quantitative easing on sales and earnings for H2 2013. For emergingmarkets higher yields in the US could see an outflow of funds, resulting in weaker emerging markets currencies, which in turn could be positive for exporters. For domestically focused emerging market companies there is a potential risk of inflation tocontend with.
The S&P Pan Arab Composite index rose +1.9% 5d. Egypt had the best performingregional market last week, with the EGX 30 index gaining +14.9% 5d, driven by localbuying, as the military removed former President Mursi from power and appointed AdlyMansour (the former head of the constitutional Court) as Interim President. WhilstEgyptian markets have cheered the move, the country economic fundamentals have notchanged and the economy remains weak, with foreign exchange reserves under pressure. The appointment of an interim president could see the resumption of talkswith the IMF for the USD 4.8bn loan, but any IMF loan would come with conditionsattached, relating to the removal/reduction of subsidies for food and fuel. These factors,together with civil unrest, gives ample reason for equity investors to remain cautious.The EGX index is currently trading on 7.6x BEst PE 2014E, with a 9.7% BEst ROE2014E, a -17 % discount in PE terms and -24% lower ROE relative to the MSCIEmerging markets index. Morocco had the worst performing regional market with theMadex Free Float index -1.3% 5d.Based on Bloomberg data and our MENA coverage universe, the Industrials sector (+7.8% 5d) was the best performing sector, led by Egyptian industrials with Elswedy+17.9% 5d, El Ezz +10.0% 5d and Oriental Weavers +9.3% 5d. The Petrochemicalssector had the smallest gains +1.9% 5d, as APPC (-1.2% 5d) and SAFC) (-0.5% 5d)declined.Our MENA equity coverage universe shows the Financial Services sector (23.5x BEstPE 2014, BEst ROE 2014 of 3.7%) as having the most upside of +25.8%, based onBEst consensus target prices. The Food and Retail sector (14.1x BEst PE 2014 andBEst ROE 2014 of 28.0%) continues to have the least upside of -1.8%.
The S&P 500 index gained +1.2% 5d, as US payrolls increased by 195,000, aboveconsensus estimates of 165,000 and hourly earnings increased. Financial, industrialand health care companies led the gains in 9 out of 10 of the S&P 500 industry groups.The S&P homebuilders index fell-3.4% on concerns over the impact of higher treasuryyields on mortgage costs and hence housing demand. Dell lost -2.1% as Michael Delland Silver Lake said that they would not increase their offer, as they bid to take thecompany private.The Euro Stoxx 600 index rose +1.2% 5d, as both the European Central Bank and Bankof England stated that Eurozone interest rates will continue to remain low for anextended period of time, meaning, according to the ECB, more than 6 to 12 months.Nokia gained +9.1% after it agreed to buy Siemens 50% share in their Nokia SiemensNetworks joint venture for Euro 1.7bn, lower than expected. However the acquisition
resulted in S&P cutting Nokia’s credit rating to B+, citing the impact the acquisition willhave on the company’s net cash position. National benchmark indices rose in 15 of the
18 western European markets.
Emerging and Frontier Markets
Frontier markets gains were led by the MSCI FM Africa index +2.3% 5d, whilst theMSCI FM excluding the GCC index rose +1.2% 5d. Emerging markets declinescontinued to be led by the MSCI EM Latin America index falling -4.3% 5d, followed theMSCI EM Asia -1.7% 5d, whilst the MSCI EM Eastern Europe index was effectively flat-0.5% 5d.