Euro-zone stocks lead the way as world markets rally

February was a strong month for risk assets as global equity markets rallied sharply.

Euro-zone equities ranked among the best-performing stocks globally as concern over the possibility of a Greek default and the continuing conflict in Ukraine calmed with the announcement of a four-month bailout extension in Greece and a tentative ceasefire in Ukraine.

In the United States, the monthly jobs report showed continued strong hiring in January with a 257,000 advance in payrolls as the unemployment rate moved to 5.7 per cent.

Towards the end of last month, the Federal Reserve chair Janet Yellen testified before Congress. Market commentators largely interpreted her remarks as dovish, with most delaying their expectations for a first increase in US interest rates to September or October. In the fixed income space credit spreads generally tightened, however, US 10-year yield moved higher, US economic data on balance continued to improve.

Asian markets in general performed well with a number of Asian governments demonstrating their willingness and ability to support economic growth.

The oil price appears to be stabilising and there is tangible evidence that the supply side of the equation is adjusting towards a longer term supply-demand equilibrium. The energy information administration forecasts that Brent crude oil prices will average US$58 a barrel this year and $75 in 2016. Brent rose to $61.78 a barrel on February 28, registering the biggest monthly gain at 32.8 per cent for nearly six years. West Texas Intermediate (WTI) crude, however, rose by a lesser degree of 7.6 per cent pressured by excess supply of US shale oil. It appears WTI is increasingly becoming a domestic rather than a global price gauge.

In the Mena region, GCC markets experienced a slight recovery during the month, investor focus remained on corporate earnings, dividend distribution announcements and recovery of oil price. Value traded in the Mena region surged by 15 per cent month on month to reach $62 billion, and total Mena market capitalisation increased by more than 6 per cent to $1.2 trillion.

At the sector level, Saudi Arabia’s Tadawul petrochemical index was up by 3.2 per cent during the month, underperforming the general index, which was up by 4.9 per cent.

In the banking sector, all UAE banks have now released fourth quarter numbers. Aggregate net profit increased by 26 per cent year on year for 2014, growth in earnings was primarily driven by sharp decline in provisioning and strong growth in fee income and other non-interest income. Strong economic growth led to decline in provisioning, whereas buoyant capital market activities and pick-up in trade finance supported higher growth in fee income.

In Saudi Arabia, system-wide data for January was released and loan growth stood at 0.7 per cent month on month and 11.2 per cent year on year. For 2014 the combined profit of Saudi banks increased by 10 per cent despite tighter regulation on retail banking and mortgages.

In the telecom space, the Saudi telecoms regulator reduced interconnection tariffs, and as a result the sector came under pressure dropping by 3 per cent during the month, bringing year to date returns to 8.8 per cent. Mobily’s board removed the company’s chief executive and failed to announce a dividend for the fourth quarter.

Turning to Egypt, the stock market dropped 5.2 per cent during February, bringing year-to-date performance to 4.6 per cent. In dollar terms the overall market has lost 2 per cent in 2015. The Egyptian pound stabilised during February after a 6 per cent decline the previous month. At the stock level Commercial International Bank reported 2014 earnings of 3.7bn Egyptian pounds. Earnings were higher than market expectation and recorded a growth of 24.5 per cent compared to 2013.

As per the latest central bank data, total loan growth in Egypt accelerated by 1.2 per cent month on month in December and 14 per cent on a year-on-year basis driven by public sector corporate loans and retail loans.

In summary, the outlook for regional markets remains solid. Catalysts include increased dividend payments, oil price stability and recovery and a positive global backdrop.

Saleem Khokhar is the head of fund management and head of equities at NBAD Global Asset Management.

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