By Sarah Townsend
Investment experts warn over risk-laden equity markets and possible further drops in regional stock exchanges in days following UK vote
The UK’s decision to exit the European Union (EU) is expected to derail plans by GCC companies for initial public offerings (IPOs) and bond issues, according to the chief investment officer of Emirates NBD.
Gary Dugan said he agreed with the UAE Central Bank’s prediction on Sunday that the country (and wider Gulf) is unlikely to suffer a significant negative impact as a result of the winning ‘Leave’ vote.
“Clearly, we do rely on British tourists but we also relied on Russian and Chinese tourists but we’ve kept going since [their numbers depleted]. The UAE is a dynamic economy and I don’t think people are going to say this is the epicentre of any crisis,” he said.
However, in the medium term, companies may opt to delay IPOs and bond issues or shelve them entirely as it becomes more expensive to raise money in a volatile market, Dugan added. An increased number of regional IPOs and issues were expected in the region in the second half of 2016.
Dugan said: “This medium term issue will pose more of a problem [than any immediate impact] because there are, broadly across the region, quite a few companies that still need to raise money because of problems we’ve had with the low oil price.
“So if [the Brexit vote] makes money more difficult or expensive to raise then it could cause them some pain.”
Dugan also warned that equity markets across the world “could test their February lows” in the coming fortnight with a knock-on impact on GCC stock exchanges.
The Dubai Financial Market sank 4.8 percent shortly after opening on Sunday morning, before recovering to close at 3.25 percent.
“There are mentions of downside risk,” Dugan said. “So we’re saying [to clients], be careful, we could see a move back to those very low levels over the course of the next 1-2 weeks.
Equities, he said, would be among the worst-hit asset classes. “We felt these markets were expensive and relied heavily on there being good growth with low interest rates.
“Now, we are likely to have modest growth with maybe some higher interest rates across the world.”
David Zahn, head of European fixed income at Franklin Templeton, agreed: “I would expect what investors consider to be “risky” assets such as equities and corporate bonds to underperform and for there to be a flight to quality to those perceived as less risky”.
Such classes include US treasury bonds, which slid only 1 percent globally with news of the Brexit decision on Friday, against global equity market drops of 4-5 percent.
Zahn also warned that trade agreements between the UK and other countries could be complex to renegotiate. “The UK has not had to negotiate a bilateral trade agreement since 1976, so I think one has to question how fast it can be done.
“We’ve seen how long it can take. And it’s not just trade, there’s also movement of labour and important issues like flying planes: the EU has more than 60 different agreements around the world allowing planes from the EU to fly over and land in other territories. The UK has none.”
However, Dugan said this concern has been “overplayed” by the Remain camp. “The UK is only 2.5 percent of global trade so would not be perceived as a big worry for any particular country that wants to do a bilateral agreement – compared to any agreement with Europe, which represented 25 percent of global trade.
“I think the UK will still find it relatively easy to freely trade goods and services.”
Shailesh Dash, CEO at Al Masah Capital, said that in the mid-to-long term, “Brexit would have no impact on GCC markets including the UAE”.