MENA Markets Review: February 2019

Kuwait: March 7, 2019


Markets continued their advance in February supported by positive prospects for a US-China trade deal, in addition to an increasing conviction that the Fed is done raising rates during the current cycle.

  • Markets continued their advance in February supported by positive prospects for a US-China trade deal, in addition to an increasing conviction that the Fed is done raising rates during the current cycle.
  • Developed markets advanced in sync with the US markets. The MSCI AC World Index added 2.50% bringing its year-to-date return to 10.50%. EM performance was mixed dragged down by South America, Russia, and Turkey.
  • GCC markets performance was mixed with Saudi, Qatar and Oman down. The UAE markets were top performers, followed by Bahrain and Kuwait.


The first estimate of 4Q18 GDP showed growth at an annualized 2.6% – slightly above the consensus of 2.2% but nevertheless slower than the 3.4% recorded in Q3. Consumer spending, worth around 70% of the economy, grew a solid 2.8% though slower than in Q3, while net exports remained a drag on growth due to export softness. The figures meant that growth in 2018 overall reached 2.9%, up from 2.2% in 2017 but slightly below the 3% targeted by President Trump despite a large fiscal stimulus earlier in the year. As this stimulus continues to fade and the lagged impact of earlier interest rate hikes feeds through, growth is seen slowing further going into 2019. ‘Nowcasts’ by both the Atlanta and New York Federal Reserve banks point to growth of below 1% in 1Q19.

Indeed, as data releases begin to return to normal following delays due to the shutdown, evidence of moderating growth has continued to build. Retail sales growth dropped to a more than two-year low in December as households rebuilt savings, while personal incomes in January fell month-on-month for the first time since late 2015. The housing market also continues to suffer, with home prices rising more slowly in December (4.2%, a six-year low) and existing home sales down 8.5% y/y in January. Consumer confidence bounced back in February following the end of the shutdown but remains well below its peak of last year. Still, with the labor market in decent shape (unemployment at 4% and wage growth above 3%), any downturn in consumer spending seems unlikely to be severe.

Away from the household sector, business activity is also decelerating, though from levels that pointed to overheating through much of last year. The downturn is most pronounced in manufacturing – often considered a lead indicator of overall economic health – amid softer global growth and concerns over the US-China trade dispute. The ISM manufacturing index, for example, hit a more than two-year low of 54.2 in February, and signaled that cost pressures are easing. Service sector growth is also trending lower, though the surprisingly robust ISM non-manufacturing index score of 56.7 in February points to a gentler pace of deceleration than in industry. Optimism in both sectors would be boosted by a US-China trade deal.


Concerns over growth in the Eurozone persist, also with particular worry over the region’s important manufacturing sector which is exposed to the global slowdown and heightened trade tensions. February’s Eurozone composite PMI score of 51.9 points to economic growth of around 0.2% q/q in 1Q19 – unchanged from Q4 – though did at least edge up for the first time in six months suggesting a degree of economic stabilization. The manufacturing component fell to below 50, signaling contraction, with new orders declining by their most in six years, and the closely-watched German Ifo index points to a steep decline in business investment ahead. However, the relative strength of both the services sector and the labor market – unemployment remained at a decade low of 7.8% in January – provide some grounds for optimism that the region will avoid a recession.

Having ended its asset purchase stimulus program in December and signaled possible rate hikes in 2H19, the European Central Bank, like the Fed, appears to be shifting in a more dovish direction. Its growth forecasts for the region are expected to be revised down at its March meeting, and it looks likely to discuss restarting its program of offering cheap long-term loans to banks (“TLTROs”) to support credit growth. Also important is the persistent weakness in inflation: core inflation fell back to 1.0% y/y in February, well below the ECB’s “below but close to 2%” target.

Just weeks ahead of its scheduled exit from the EU, the UK has yet to agree the terms of its departure. Prime Minister Theresa May is seeking improved terms with the EU following the overwhelming rejection of her negotiated deal by parliament in January, but the chances of securing satisfactory changes to the contentious ‘backstop’ component currently look slim. Assuming that any new deal is again voted down, parliament looks likely to press for an extension to the UK’s exit date. This would have to be agreed by the EU and is complicated by the UK’s uncertain participation in the EU parliamentary elections in May. It is also unclear what any extension would achieve. Brexit
uncertainty is not helping the UK economy, with the PMI index showing growth in the dominant services sector at 51.3 in February, consistent with near stagnation in 1Q19.