By Khaled Sifri
GCC equity valuations remain reasonably attractive given the global economic circumstances, and investors are becoming more comfortable with investing in start-ups
The year 2016 will be remembered for two landmark electoral results — Donald Trump’s rise to president of the US and Britain’s decision to leave the European Union. These events (and others) shocked the status quo. They obliged all thinking people to reconsider their convictions.
Are these political developments a simple popular knee-jerk reaction to years of liberal economic policies and globalisation, or a harbinger of more fundamental shifts in global social norms?
Most intelligent investors make decisions that depend on their view of the world at a particular moment of time and into the foreseeable future. However, the possible scenarios for political outcomes are now wide-ranging and predicting the direction sovereign states will take is uncertain at best.
The fundamentals underpinning the economy and the financial performance of businesses can be severely impacted by unpredictable political incidents. Under these circumstances, it becomes hard to develop convictions further to which investment decisions are made with a reliable certainty of outcome. Hence, an inclination to take less risk prevails.
On the other hand, persons of wealth are obliged to take decisions (even at times when decisions are hard to make) regarding the deployment of their money. In uncertain times, finding value requires more careful selection than usual.
As we look to the year ahead in our part of the world, equity valuations remain reasonably attractive under the circumstances. Relatively high and sustainable dividend yields make many GCC stocks an appealing destination.
Along with the proposed initial public offering of Saudi Aramco, the big piece of corporate news in 2016 was the announced merger of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB). Since then, speculation has been rife that the UAE banking sector will experience enhanced returns, create synergies and improve efficiencies — so banks in the UAE look to be fairly attractive, particularly if we see further improvements in the domestic economy.
For investors in the GCC with an appetite for exposure to privately held businesses (as opposed to listed securities), opportunities in various sectors, including healthcare, hospitality and food, are worth considering.
Also, it is important to note that investors have recently become more comfortable with exposure to businesses in their early stage of development, which can be referred to generally as venture capital (VC). Historically, those interested in VC felt restricted to opportunities in advanced markets, such as Silicon Valley. Nowadays, locally brewed efforts have shown resilience and a few have provided their investors with exceptional returns. It should be noted, however, that VC investing involves taking high risk and needs to be taken in moderate doses.
In the US, all signs are pointing towards the Federal Reserve raising interest rates one or two more times in 2017 after December’s hike, in a move that is intended to pre-empt rising inflationary forces. Increasing interest rates, even gradually, will have a negative impact on US dollar denominated (and pegged) fixed income instruments (bond prices suffer when interest rates go up). So investors need to be careful not to unnecessarily increase exposure to fixed income securities.
Increasing interest rates on US dollars is expected to make the value of the world’s reserve currency strengthen further. Such strengthening may have a negative impact on US exports, which is counterproductive to President-elect Trump’s agenda. Will politics intervene to take the economy in a different direction?
The speed at which inflation recovers also needs to be monitored. If the world economy manages to materially reignite inflation, then the currently prevailing cautious sentiments will start to abate and consumption will pick up. Investors will then be able to breathe easier and revert to their old habits, regaining confidence in making investments more broadly. Until then, selectivity will certainly remain the name of the game.
Khaled Sifri, CEO, Emirates Investment Bank