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tv   Best Of Bloomberg Markets Middle East  Bloomberg  June 3, 2017 1:00am-2:01am EDT

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>> welcome to "the best of bloomberg markets: middle east." the major stories driving headlines this week, the gulf has been rocked by a deepening spat between senior nations. qatar's simpthi remains -- the remains under -- foreign reserves falling below $500 billion for the first time after 2011 after the kingdom
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raised money if the sale of international bonds. south africa's controversial president survived an attempt to drive him out of office but remains under pressure. the majority of the african national congress wants jay cop zuma out. first, the growing tensions in the gulf with saudi arabia and the u.a.e. media continue to ttack qatar. >> it came out of the blue a little bit. in 2014, the three countries, bahrain, saudi arabia, and u.a.e. withdrew their ambassador from qatar over smor this conflict of support of the muslim brotherhood in egypt. suddenly sort st of exploded on the scene again
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after the trump visit, after this show of unity, the american support for the saudi line suddenly on iran. ey want a united front, they wanted american support. they've been unhappy with obama on that front. now they have trump's support on it. and they see qatar sort of not toing the line, not being in line with their thinking. on iran. >> and this was all over some statements that appeared on the qatari website. that's been removed. what trigger is this? they are blaming it on hackers. how reliable is what they're aying right now? they said it was hackers, these statements were critical of the policy that was espoused in saudi arabia. the qataris saying these were
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hackers seem sob distancing hemselves from that. the reaction from saudi arabia is mainly in the newspapers. the u.a.e. minister was the first to come out and say officially that there was a crisis. but what fed the rage, as it were, the anger, was that the qatari emire called the newly elected iranian president and made conciliatory noises, saying they want to overcome some of the differences. >> we've spoken quite a bit about what's happening with saudi arabia an the reactions of some of their peers how much has qatarred on the other side of the fence reacted to all of this? >> very little. apart from saying this is not true, we were hacked, these are not statements that our emir made, we haven't heard much from them. we're not seeing reaction to them from attacks coming mainly in the saudi media now. a lot of u.a.e. newspapers
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joining in as well. so far they've been quiet. in terms of rereacting. clearly there's something going on. clearly there's tension. >> let's briefly speak about what's happening with this divide, with these tensions. what are your takeaways from it? in terms of the credit default swaps for the five-year spread if you take a look at what's happening in the market. still nothing significant yet. >> nothing significant yet. on the political side, that's not all. on the market side, the qatari markets are volatile. the only thing is -- it increases foreign investment risk premium on the market. the answer is prolonged and we're seeing foreign investors being net sellers. nothing significant. we're not seing the market crashing. >> other big theme throughout
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the last few weeks has been the lack of volume, the lack of liquidity in these markets. ultimately we put up the key market of interest as it prepares to open up to the emerging market index, arguably, you know what i just found out this morning when i was looking at the weis function in terms of global exchanges, it's one of the worst performing exchanges so far this year. most of these sectors are trading to the downside. some big losses for consumer services, capital goods and the banks as well. look at that, down 5.3% this year. there was a view from bank of america-merrill lynch that the market is underpricing the big opportunity that could be at play here. is that true? or is there a fundamental diskeck between saudi economic reality and market reality and some of the other perceptions? >> if you look at the economic reality in saudi now, it's all
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related to oil, oil is around $50, you've seen reserves being depleted, that's reflecked in the market. the other story -- is a different thing. long-term we're talking about an event that can be 2019 nearest in my view. that's -- we're seeing foreigners slowly trying to chip in in stocks that are expected to have -- to be heavyweights in the potential inclues but it's still, i'd say we're still two years away from that. we're seing the market reacting aggressively. i think it's going to be difficult. so if we're asked about the market pricing in a potential inclusion, that's still a bit. >> saudi arabia is a huge market with a reputation for being a bit less agile than the rest. and now we're seing so many reforms. how has this impacted investors? >> we've seen it impacting
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investors. i was on this show basically saying i think reforms will be positive long term but we haven't seen it filtering through the economy yet. i think that's why investors are being cautious so far. >> coming up on "the best of bloomberg marks middle east," saudi arabia's foreign assets have fall ton lows not seen in more than six year. why the record sale wasn't enough. this is bloomberg. ♪
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>> you're watching "the best of bloomberg markets: middle east." saudi arabian foreign assets drop below $500 billion last month for the first time since 2011. and that despite raising $9 billion recently in an international bond sale. >> it was a surprise, people
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were expecting the number to increase in april after the kingdom raised $9 billion from its international sales -- what we have found instead as it went down almost by the same amount. went down by about $8.5 billion. the reserve burn is accelerating. it's not easing. that was a surprise in the data, especially that people don't know what's driving this. what's driving the decline. and that's the concern here. >> exactly. so what's the speculation out there behind this unexpected drop? there must be some theories out there. >> if you talk to the overnment, they gave one possible explanation before this month. he said the government didn't withdraw from the central bank in the first quarter so this could be they're paying back to contractors and those
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contractors are paying back overseas vendors, importing raw materials. that's leading to the reserves decline. there's also speculation around capital slight. the central bank itself is not denying that there is capital slight. but again why -- capital flight. but again, why to is capital leaving? to pay back venn tores? or people are looking for more investment opportunities? or, more concerning, because saudis or people are concerned about the economic direction of the kingdom? >> what's the crucial level here? $500 billion? when does it become a problem for the economy. what's the critical number? >> $500 billion is a lot of money still. so nobody -- you struggle to find someone who would tell you this is really critical, you know, it's in danger. agencies look at the net assets of the kingdom, and it's around 100% of g.d.p. so it's strong.
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the concern is people don't know why the reserves are ede-- are declining and it's heading in one direction. that's creating uncertainty. when will this decline ease? when -- because the fwoth says we'd rather spend through raising debts rather than reserves. and the government isn't -- there aren't really that many signs of the government increasing spending in the economy. that's the concern. people don't know what's realy driving this decline. >> we've got more on this from bank of america-merrill lynch managing director and managing director of frontier management research. >> this is something we've been expected, we expect the saudi economy to continue facing some head winds and growth, to be lackluster this year. and looking forward, we actually expect 2017 to be a very difficult year for the banks in saudi arabia. really the bottom of earnings. we also expect other issues to start showing themselves such
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as asset quality deterioration and the like. these are headwinds the saudi arabia economy is facing. we expect that drawdown to continue. the good thing is the saudi government is implementing a lot of new and, i think, very worthwhile changes which are really going to start to stem the flow of currency out of the country. >> in terms of the reform process and what kind of results, what kind of returns are coming off the back of that we put that all together on a chart we can put up, a fab ulous representation of what's happening with capital enflows in terms of foreign investor net, right? the lines in red outflows, lines in green are inflows. and there's a reference line in white. as much as there might be a few increases as of may, as a percentage of total volume,
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these are almost edge inable amounts of parties -- negligible amounts of participation. this underscores what we've been hearing all along, including from deutsche bank c.e.o. who expects $35 billion of inflows off the emerging market. is that too bullish a case? >> look, i think that looking at the saudis' potential inclusion in the emerging market, that's probably one of the most interesting and opportune events that's going to happen in our region. $35 billion, $36 billion is fully plausible and could indeed be too conservative on our numbers. there are scenarios depending on how large the i.p.o. of saudi aramco is and ha the valuation is there ultimately and we see a range in the market for what that could be. there are snarees where you could see a multiple of that number coming in, albeit unlikely this reform and market
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inclues is a hugely important driver of foreign currency inflows into the saudi economy and it's needed very much and the data today confirms that even further this pace of reform is becoming more crucial for the saudi economy. now as your data shows here very clearly, people are not invested in this market. there is a very big opportunity and people are beginning to wake up to it. thus far it's been off benchmark so people are now thinking, right, it's about time that we start to do the work on this. if on the 20th of june we see the inclusion coming through from mscied on its watch list, people are going to start waking up. people will want to kick the tires. this is going to be a big deal. point. s my how long will it take after the inclusion happens or just before the inclusion happens for foreign and institutional investors to wake up point. how long and flock to the market? >> ok so we've got a number of precedents for this if we look forward the inclusion of qatar
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and the u.a.e. fromen from frontier markets into the emerging markets index that took a length of time. but we think this is more urgets so it's going to happen on a more expedited basis for saudi arabia. let's say june 20, a positive result comes out. we think it will take aier of consultation between msci and the investor base and -- investor base, if they come out with a positive result we'll see in june of next year an announcement that saudi will be includeded an the inclusion will come in june of 2019. the key thing is investors won't wait until june of 2019 to start putting money to work in the saudi economy and it will come around 2018 between the middle of 2018 and thed my of 2019 you'll start to see big flows as we did with the u.a.e. and qatar. bear in mind that during that time those markets gained eight p.e. points between -- so this
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is a big opportunity. people aren't invested yet. they are going to start looking at this and we are very excited about the potential opportunities. >> the fact is, saudi arabia has moved incredibly fast when it comes to the pace of reforms and investors haven't really caught up with the changes how much has -- how have all these changes affected investors directly? >> the number one concern is the increased burden that the pace of reforms is putting on corporate profits. and there is still a lot of unknowns on that side. we are seing a lot of difficult austerity measures being put in place, whether it's the removal of subsidies, the removal of electricity price increases, gasoline price increases and the like and many other, like taking a lot of fat out of the system so to speak that
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undoubtly is going to have to start impacting corporate earnings. the good thing is we think there are a lot of efficiency gains to be made in the saudi economy. haven't really been driven or been provided incentives to really change that until now. so we think that there is a lot of efficiency gains to come through in the saudi economy and that could be something that surprises, we've already seen corporate profits taking a bit of a hit because of the changes implemented in 2016 but the reality is that it could have been a lot worse and the companies are counteracting this by implementing new measures themselves to offset that. there's is real opportunity for gains here that we didn't foresee and that could be interesting. but still there is an air of caution. there is still a lot of head winds that are being faced in the saudi economy. when we look at the banks, for example, we're caushes but optimistic. i think that's view we have on saudi arabia in general. next on the best of bloomberg markets middle east.
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u.a.e.'s -- u.a.e. sues the kurdish government in iraq for $26 billion. details ahead,ed this bookberg. ♪
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>> welcome back to the best of bloomberg markets: middle ast. they are seeking damages of at east $26.5 billion from iraq's self-governing kurdish region. the story emerged on wednesday. >> that figure is a huge figure in terms of damages. that's a court case in court now, we don't have any visibility on what kind of damages they'll get and how much they'll get. this was a filing they made with the u.s. district court in washington, d.c. at the same time they are going arbitration court in
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london. this allows dana gas to register the case with the u.s. courts, that would allow dana gas to go after kurdish assets if the kurds don't pay up on some of the awards they've been given and some others they expect to come down the road. >> so the case is in court right now. what happens next? >> we're waiting for the decision on exactly those big damages that -- damages, that that yousef mentioned. they said they expect that hearing to go ahead in september and that they would know the amount of those -- of that award in september. this is the first time that the company has come out and disclosed the amount that they've been seeking. they haven't said it yet. this is a big figure for the market to see. coming into some money there would help dana gas with some of their financial issues they've been battling back
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payments and overdue debt for a while. $00 million ot coming up they need to pay off, got about $300 million in the bank, so they're looking at restructuring that, but we're talking about the company's growth down the road. they want to develop those fields in kurdistan and think they have a huge opportunity to go forward and produce more, sherry. yousef: we get you more on the economic outlook of the region ahead. this is bloomberg. ♪
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>> welcome back. after a phase of austerity is saudi arabia set to increase spending again? we spoke about the kingdom's finances with monica malec, chief economist with abu dhabi commercial bank. >> we have seen periods like this before however the positive side is none of these political tensions fed into the economic side, economic policy, trade, and so on. and with kuwait stepping in and being appointed as the mediator we hope again that any impact on the economy will be none, so from the economic side, we're focusing on our air -- on other
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areas, as you mentioned. oil, we had the opoke meeting. those are more the areas of focus for us as economists in the region. >> speaking of areas of focus, pulled up again the state of play when it comes to saudi reserves this has caught the attention of quite a few analysts and experts in the field. you see the blue line, that's your crude prices. the white line is saudi reserves dropping below $500 billion for the first time since 2011. how do you explain this? initially the bond sales should have contributed to an increase in those numbers. what's happening here? is the cash burden too high? >> well, absolutely it surprised us. $9 ad expected that the billion in april would have led to a slight rise in reserves. nd what we instead saw was $8.5 billion drop and that was
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not expected. with edid see some of the funds moving into the data, into the monetary data. you've got government deposit the current account increasing and also you saw government reserves in the banking sector increasing, that accounts for some of it. nevertheless the sides of the drop, the magnitude of the drop, shows that spend regular mains high. not budgeted spending because we had the figures for that but it's likely ex-budgeted spending. investors need to see the pace since prices have recovered and we've seen government remaining tight on spending. >> we're talking about saudi arabia and its decision to reduce exports to the u.s. specifically. they haven't done that in the past. usually reduced output levels
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overall. how significant is this shift? >> i think it is very significant. a lot of the visible inventory buildup that we've seen over the last year has happened in the u.s. part of that has to do with shale production. it has also had to do with strong imports into the u.s. now because the focus of the markets really is on two actor, the supply gap -- i'm sorry, the supply excess and inventories, saudi arabia is targeting those visible inventories. one the areas we highlighted in our research is that there were a number of issues with the earlier deal, one is that its overall production, exporting cunlries could still focus on key marks including the u.s. this is a very important shift. there were no indications how other opec countries were going to respond, if they were going to see the same start but i think that's critical.
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i think another critical point is that moving into the higher demand season in the g.c.c. as the temperatures rise. a lot of the production will also have to be used domestically. this has gone down over the year, but still demand increases in the summer period. >> what happens if other countries join saudi arabia and specifically target exports to the u.s.? is there a likelihood we could see prices being impacted more significantly than just a broad output -- than just broad output cuts? >> well, i think that's the area of focus. but it's really the question of shale producers. if you do see inventories falling sharply in the u.s., price support coming in from that, we would see more shale production coming in. so this is going to be an issue that's going to remain for opec and other nonopebling members
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involved in this deal. the critical issue i think with what saudi arabia particularly is looking to balance at this point is not having such a rebound in oil that you have a big resurgence of shale production, but at the same time they want oil between $50 and $60 a barrel so they could seize the -- ease the pace of fiscal consolidation required. we've already seen that this year in activity in saudi arabia. >> monica, let's look across the red sea to egypt and the latest decision to go ahead with a $2.48 billion social spending plan. they're trying to offset the declines people have seen in real incomes, to metals we haven't seen in year -- to levels we haven't seen in years. what's that going to do to the economic outlook? >> we have to balance, we have a deep pace of fiscal reform already, ahead of the i.m.f. deal coming in last year,
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whether that's subsidy reforms for energy prices or the introduction of v.a.t. we have seen some -- we have seen some highly positive developments with inflows, reverse has gone up to about $5.5 months of import. but this is going to be a long-term adjustment program and what they haven't really tackled so far is the job creation -- the job cree they job growth, without having support measure miss place, the economic impact will drive economic activity more down. it'll constrain it. and one of the key areas that they do need to do is provide a social safety net for the people who most need it as these reforms continue. >> we are in the month of ramadan and people tend to do things differently in that month. in terms of the wider region and economic trends what are you seing? >> well generally, historically
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you see slightly quieted pace of economic activity. what we have seen, for example, in the u.a.e., for example, a lot of project activity a lot of project award before we enter the quieter period as, get ow, the ability to that done tends to slow. compared to 10 or five years ago, economic activity is stronger. you have seen more business as usual. and of course the one thing i remember always is from last year where you know, covering saudi we had so many announcements about the economic plans and those came in the evening after the fasting was completed. so i think things are changing but overall we do seem to have quieter economic activity during the ramadan period. >> monica, we are seeing markets react to the ramadan period as well. let me get back to the inflation issue in egypt.
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the central bank there had hiked the rates to tame inflation. given that we're seing this huge social spending package of more than $2 billion, what's that going to do to prices? >> well, i don't think you're going to see that much secondary inflation coming on the back of the spending increases. i think what you will do is the government looks to move ahead with further fiscal reforms on energy prices, that's going to be the main catalyst. so we're not so worried about the increased spending driving inflationary pressure. it's very much reform driven. and we had already seen from the devaluation the secondary impact had started to come down as a result of that we continue to believe it's reform driven. we do not believe the 200 basis point rate hike we saw earlier this month will have much impact, the transmission mechanism to inflation in the
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real economy are not that strong. it's going to be a reform driven story. that's why you need the social spending to provide the safety net for those most vulnerable. >> that leads really to a key followup here. the transition mechanism doesn't work, if the 200 basis point hike wasn't the best way to deal with it, what should they do more to try to bring inflation or get inflation under control here monica? >> well i think it's really a medium term investment story in the case of egypt. a lot of it has to do with inefficiencies of the distribution system, for example, in food prices from the production of at the farms to getting it into the shops, into households and so on. so i think a lot of investment is needed, improvement in getting food and other products to the market and of course for these area, you do need
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investment, investment in egypt has been very low over the last few years an has not kept up with the economic requirements. and what we're hoping with this i.m.f. program, they've tackled the first part, they've tackled the capital inflows, they tackled the ability for the government to meet its deficit. we -- we are not concerned anymore about meeting its external funding requirements. but the next stage really will be to boost economic activity, to boost investment, to create jobs, to improve the structure of the economy. >> coming up, how much longer than south africa president zuma hang on to his job? we'll tell you what the polls have been saying. this is bloomberg. ♪
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>> welcome back to "the best of loomberg markets middle east."
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president zuma survived an attempt to oust him. we have more from johannesburg. >> we have seen calls to have him ousted as president if opposition party bus now it seems mounting pressure within his own party, the ruling african national congress, for him to leave. what we do know is that the big things that are at stake is the credit rating downgrade which happened after he reached out for the cabinet quite surprisingly. it seems the mounting pressure from within the ruling party, which -- which he is leading, could seize it. >> what's going to be the next milestone that could decide president jacob zuma's fate? what's the key event? >> we know that the ruling african national congress' decision making body in the a.n.c. met over the weekend and
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they cited the credit ratings downgrade as a big concern and a reason for him to be stepping down as president. they will be releasing a ratings review on the country's growth prospects. we'll be keeping a close eye on that as that could be a pressure point. another key factor is that the a.n.c. may lose more and more support. it's lost support in every election since it was elected in 1994. that's 23 years ago. it has another presidential vote in about two years' time. so we could see the a.n.c. facing a larger -- its biggest loss in support and possibly defeat overall in ruling the country. >> yes, so as zuma retreats or his influence retreats, who could be the winner of this political drama? >> well it does seem as though the succession battle has been opened. we know a.n.c. says names can be debated now. one they have -- one of the frontrunner is one of his
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ex-wife -- is his former ex-wife -- is his ex-wife. she's been leading the campaign, going to brunches, campaigning as possibly the first female president of the party and possibly south africa. another front runner is his deputy president who has been supported by not only union leaders but he seems to be mounting more and more support from the business sector as well as business leaders. > we've got more on the impact . >> the rand has been one of the best performers in may. what's been happening not just with the rand but a lot of high-yielding currencies is any bad news is being bought into. there's a wall of money that continues to be flooding into e.m. assets overall. looking for a low volatility environment. that's going to continue despite the sort of news you would think would have an opposite impact on the
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currency. that clearly was felt this morning. overall that's going to continue to see flows into the currencies, a backdrop of a relatively weak u.s. dollar where the u.s. yields caps as well and low volatility. it's hard to see this turning around any time soon. >> we put up on the charts the volatility you're talking about and added some deeveyages. you can see the perspective. these are the one-day price changes from south african rand. you can see some of the spikes that happened around march, as we head into april for the upside. in term of the political situation in south africa, what would a continuation of the government of jacob zuma mean for the country, for the economy, and for investors. >> well i think overall clearly investors are looking for an upturn in economic data and wherever that -- whether that is going to be brought about by a political change or not is
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something that is still a focus at the moment. obviously there has been a number of political uncertainties, a numb of issues obviously weighing on zuma's presidency. that's going to be something that's going to lurk in the background. i think at the moment overshadowing all of this is this wall of money that's continued to come in. the stability perhaps you could argue that some stability in the political environment may even help this. but that's uncertain at this point. it's very volatile political environment and i think that's going to continue to be the case in south africa. >> coming up next, it's ramadan and we'll look for the best investment strategies at this time. this is bloomberg. ♪
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>> welcome back to "the best of bloomberg markets middle east." ramadan is here, so we asked
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our experts which sectors stand to gain the most. >> performance is actually contrary to popular belief positive. negative in the months before and after. one interesting thing that is happening this ramadan this wednesday you have a rebalancing, you have a lot of inflows and outlow -- outflows on specific stocks and benchmark names. in the u.a.e. you have the inclusion and you can see the market is down 6%. i think might see some positive performance in the next few days but then usually post inclusion in the months following that. in egypt you have so far getting removed from the index so that would be negative but it would be a buying opportunity once the outflows are out. i think there will be some bargains in some of the other names as a result of outflows of emerging markets. that's what investors should be looking at. >> we put up the seasonality
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function on bloomberg. his is a case of the saudi market, you can do the five and 10-year summary. you can see the month of june, it tends to be a negative one. 10-year average as well. it's not ramadan specific but it's a great way to benchmark averages and seasonality. which sectors could you trade here? that's the -- does the traditional thinking still apply, this is ramadan, more consumer spend, look at retail, go defensive on construction, on cement, on banking, is that still valid? >> i think to some extent in saudi arabia it would still be valid especially with public sector allowance this is year, that would support the consumer team this year as going into this year people were more negative but with restatement, i think also for consumer looks slightly better. so yeah, i would agree with that. i think consumers would stand
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out potentially. >> you mentioned that we should see a lot of activity this week due to the rebeling, so what should we expect? should we see trading slowing down all over the region? and what would be the market that we tend to actually recognize more activity? >> i think usually what happens is that across the board, without exception, you have falling volumes in ramadan. i think selective events might lead to a change in that. if you have a global macro event like oil prices falling to $40 or $30 a barrel, which you do not expect that would probably lead to higher volumes. one thing i would say, toward the end of the ramadan, you have the june review coming up, that's important for saudi arabia. maybe traders will come back to their seats earlier than usual because it's a major event, and major announcement that we're expecting for the saudi market. >> the volumes in saudi have been low recently. do you think we should see a
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pickup in the middle of the ramadan? >> i think retail and individuals come back to the market definitely. that's the reason volumes have been lower than usual recently. i think there's still -- they're still adjusting to the changes and people are still -- maybe with that they'll come back to the market. >> how do you see the review playing out in the market aside from volume? >> we think that this is going to basically mean much more foreign investors will be looking at saudi arabia more closely at the moment if you're a global emerging market investor, saudi is not on your benchmark, there's no urgency to look at saudi arabia. debt is still below 1% below market cap. soic there is a lot of room for foreign influence into saudi arabia. over the next two to three years, depending on active position, we expect between $35 billion to $50 billion.
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>> that's it for this with the best of bloomberg markets middle east." we'll be here for the start of the trading week.
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alix: coming up on bloomberg best, the stories that shaped the week in business around the world. political tensions that the world on edge. implications for trade, currency and global stability. >> transatlantic relations are as poor as they have been in a long time. >> trump needs to know who he is talking to here. >> economic data sends ambiguous signals. >> don't obsess on anyone number. >> leaders add insight to a complex picture. >> north korea's conduct is reckless, dangerous and becoming

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