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Emirates NBD reiterates positive view on Zain Kuwait

Emirates NBD reiterates positive view on Zain Kuwait
ZAIN
ZAIN
-0.81% 491.00 -4.00
CIO office at Emirates NBD Wealth Management published its weekly economic review saying markets’ volatility in the short-term to be followed by brighter outlook.
Rising risk aversion stemming from emerging market (EM) related events – rising tensions between Russia and the West and disappointing Chinese data – overshadowed good economic data in developed markets (DM) in the week.
The prevailing of risk-off among investors – the tendency to seek refuge in safe assets and to liquidate at the same time cyclical assets – is pretty evident across all asset classes.
Gold rose above $1,380, volatility for the SP500 shot up above 17%, yields on US 10 year treasury notes fell to 2.65%, DM outperformed EM stocks and globally defensive equity sectors posted better returns than the cyclical ones.
In the GCC, the Dubai equity market was the worst performer – -4.2% – followed by Abu Dhabi – -2.9% – and Qatar – -2.3%. Investors are becoming increasingly nervous after the recent run-up: the GCC market is trading at a premium versus EM equities, but is safer; while it is still at a discount versus global equities on a price to earnings basis and in terms of dividend yield.
Although the picture is mixed, we continue to think buying the dips is the right strategy, considering that some good news is still in the offing – specifically the inclusion of the UAE and the Qatari indices in the MSCI benchmarks in May 2014 – against the backdrop of strong GCC economies.
We advise as well to focus on stock selection in order to improve the odds of over-performance versus the main benchmarks.
We reiterate our positive view on Zain Kuwait, a telecom operator with a dividend yield north of 7%, and with solid operational trends, as per 4Q results.
Recently, the stock was upgraded by major investment houses and the consensus upside is 17%, not at all excessive considering its long-term underperformance versus the market. Regional credit outperformed the global market and demand was skewed towards the shorter-end of the curve, 3 to 5 year maturities. Once again the lack of new issuances was most likely the main factor behind the outperformance.
On average, GCC credit widened in absolute spread terms and Qatari bonds were the worst performers for the week.
We advocate buying the dips as appropriate in GCC credit as well, as the asset class remains fundamentally strong and corporate balance sheets still offer value.
We continue to favour our latest high-conviction trade idea on the world’s largest Iron ore producer – VALE 4.375%, January 2022 maturity.
In spite of rising market volatility VALE held quite steady as compared to EM peers.
Investors are compensated with a +230 bps spread over equivalent-benchmark US treasuries. Given muted risk-appetite the new issuance front was quite lackluster. Azerbaijan was able to issue a $1.25bn 10yr at 5%, while Mexico priced a GBP 1 bn. 100 year sovereign bond at a yield of 5.75%. No new supply hit MENA markets.
More volatility cannot be ruled out in the short-term, especially considering the result of the Crimea referendum held 16 March, and that the Fed this week is likely to decide for the further tapering of assets purchases. We maintain the view that returns for risky assets can be mixed in the next 3 months, but will be appealing on a 12-month time-frame.
The Russia-West stand-off should ultimately find a resolution as both parties stand to lose should the matter turn sour: Russia on the one hand needs Western money and would rather avoid its economy being tipped close to recession territory; Europe on the other hand prefers to enjoy a smooth stream of gas into its pipelines, instead of clashing with the provider of that gas.
What China holds in store for investors may be far less predictable, but we find some comfort in the fact that Chinese rates across the curve have been easing off the all-time highs recorded at the start of the year; there thus seems to be some commitment on the side of the Central Bank to provide the necessary liquidity to support growth when monetary conditions become too tight.