GCC markets are resuming their strong bull-run, after a brief consolidation, ahead of the MSCI upgrade for UAE and Qatar. The upgrade should result in renewed gains (on a selective basis) for those stocks that will be included in the index and have foreign ownership headroom. Volumes are expected to pick up when the final list of stocks is announced on 2 May 2014 ahead of the formal upgrade on June 2014.

Whilst the Tadawul (SASEIDX) has held well above its 50 day moving average for most of the year (the index is currently at 9,620 +12.8% YTD), April turned out to be quite choppy, following a mixed Q1 2014 earnings. Saudi retail and real estate stocks continue to outperform and we would recommend adding to Savola primary food producer with a dividend yield of 3% and its diversified exposure to oil, sugar, retail, dairy, bakery and poultry. Petrochemical and banking stocks should provide attractive entry points in the Summer; the sectors are expected to continue to benefit from cheap feedstock, as well government and consumer spending respectively.

Trading in real estate stocks continues to be over 50% of the UAE market volume. There has been a decline in overall trading volumes on the DFM as a very positive earnings season draws to a close: average earnings are thus far +18% above consensus estimates. Select company bonus share awards to shareholders should provide additional liquidity to the UAE bourses as investors position themselves ahead of the payouts and dividends.
The MSCI may reduce weight of select UAE and Qatari stocks which restrict Foreign Ownership Limits (FOL). However stocks that have recently increased FOLs could benefit from absolute return investors taking off- index positions.

Broader credit and bond markets remained range-bound as the Ukraine crisis intensifies on new sanctions imposed by the United States and Europe. Over the week, state-owned entities such as Russian Railways, Gazprom, Transneft, Rosneft, Federal Grid Co. Unified Energy System, and OJSC Federal Passenger had their ratings cut to BBB- with negative outlook by Standard and Poors. Given the better than expected sanction list, investors shrugged off the news and continued to search for opportunities in the Russian debt space and particularly in the banking segment.
Regional credit issuance kept syndicate desks and investors busy as Mubadala, Majid Al Futtaim and Abu Dhabi National Energy Co sold debt over the week. The MAF priced its USD 500 MM, 10 year bond at an attractive coupon of 4.75 % (ENBD-mandated), whereas Mubadala priced USD750 MM, 8 year bond at a coupon of 3.25 % - both these deals were announced, launched and priced intraday. Abu Dhabi national energy co (TAQA), also tapped markets after a series of investor meetings and priced USD 750 MM, 10 year bond at a coupon of 3.875%. Issuances were well received and oversubscribed.

Our latest conviction trade idea is Bank of Baroda 4.875%, July 2019 issue, which offers investors an appealing yield of 4.20%. Please refer our one pager for more highlights on this issue. We have exited our Slovenian sovereign-conviction-trades in the 5 and 10 year maturities on the back of rising political instability and ongoing tensions in the Ukraine-Russia saga. The Slovenian bonds have year-to-date outperformed many peers in the CEE area Central Eastern Europe.

Fitch upgraded 3 Qatari banks Al Khaliji Bank, Qatar International Islamic Bank and Ahli Bank by one notch to A from A- and affirmed Commercial Bank of Qatar, Doha Bank, and Qatar Islamic Bank at A.Developed market (DM) equities continue to be driven by US and Europe strength.

US growth appears now to be in a sweet spot not too cold as to be anemic, nor too hot as to make policy tightening necessary. Actually Janet Yellen confirmed the Federal Reserve (FED) commitment to keep benchmark rates low for a considerable time. Investors conviction about the US economy is reinforced by Yellens words she said growth is sustained along with consumer strength coming back by economic numbers themselves and by buoyant corporate earnings. The Q2 acceleration in US economic trends confirms that the Q1 GDP print +0.1% versus 1.2% expected was a mere weather-related blip.

In Europe lower valuations combined with positive corporate earnings growth the first time this happens since 2010 due to the 2-year recession make for larger equity upside. Although the recovery phase continues to be lackluster, its persistency leaves room for further improvement in earnings and thus sustained equity performance.

The comeback of cross-border merger and acquisitions for instance healthcare behemoth Pfizer is eying UK Astra Zeneca or GlaxoSmithkline as an alternative take-over target is also helping markets by rekindling investors animal spirits.

On the other hand the slowdown in China continues, with the HSBC Purchasing Managers Index continuing to trend below 50, the threshold between corporate expansion and contraction. Weak top-line growth in the latest corporate announcements in the current earnings season in China suggests that market sentiment towards emerging markets will remain downbeat for longer. The Brazilian company Vale SA the world largest iron-ore producer announced weak earnings, being impacted by economic trends in China, the main iron-ore buyer.

We thus remain convinced equity allocation should still overweight DM versus EM equities, specifically the US, Europe and to a minor extent Japan, where only the announcement of further stimulus measures or of structural reforms can give new impulse to equities.

As for commodities palladium has been one of the best performers in the metal space in 2014 on the back of strong vehicle sales in the US and of mounting Ukraine tensions. Strikes in the South African mining industry on top of the Ukraine-connected sanctions on Russia will continue to provide the required impetus for the market to move towards US$ 850/ounce.