While uncertainty from the US presidential election outcome is now behind us, it remains difficult to differentiate between how, or indeed if, Trump’s campaign rhetoric will translate into real action policy. It could be even harder to ascertain the impact on global economies as we move closer towards inauguration day.
Trump’s domestic campaign agenda centred on looser fiscal policy, building infrastructure and creating jobs, all of which could serve to boost global demand. His campaign also focused on trade protectionism, the more extreme factors of which are likely to shift away from measures outlined in his campaign.
These two campaign focus areas drive global markets in divergent ways; the promise of an infrastructure surge, deregulation of certain sectors, and fiscal stimulus has generated optimism, with benchmark indexes hitting record highs in the US, spiked by the surprise November 8 result. However, emerging markets remain fearful of Trump’s trade protectionism policy, resulting in the decline of some currencies — especially those with strong trade links to the US.
So what then, for the Mena region? The implications of Trump’s desire to expand the US fracking industry may result in rising oil production, negatively impacting oil-exporting countries in this region. Similarly, a policy increasing trade protectionism in the US could impact economies like Dubai, which has built its success by forging a link between East and West.
Lastly, Trump’s intention to roll back the Iran nuclear deal could also foster greater uncertainty towards this region, as would any concrete policy to confront Daesh more directly.
So while Trump’s campaign could have some negative implications on the region, we believe it will be the domestic agendas of the various countries in the GCC, which will really drive regional equity markets in 2017.
Saudi Arabia’s stock market, for example, could be propelled by its reform agenda and the ability to implement the hugely ambitious transformation plan to reduce dependency on oil revenues, by adding an extra $100 billion (Dh367 billion) a year to the region’s largest economy from non-oil sources. Also, liquidity should be the other principal element and, as demonstrated by the more than three-fold demand for the kingdom’s $17.5 billion bond issuance, it appears there is now more confidence in the country’s long-term strategy.
Raising debt has other implications for the economy including Saibor rates coming down, making it easier for corporates and the government to make good on its payments to suppliers and contractors as well as for banks who lend to those businesses. Mapping the palm of the Saudi economy will also need to take into consideration Opec’s commitment to cutting oil production and how the country delivers on its promises to work towards MSCI inclusion.
In working to tackle these domestic issues, US policy is likely to be secondary to the kingdom’s struggle between potential short-term headwinds on earnings and longer term upgrades to structural growth as they become a more efficient economy.
Further afield in the region, Egypt is similarly driven by domestic reform. The long awaited devaluation, a precondition for the IMF’s $12 billion loan, is addressing a serious imbalance in the economy. As the Egyptian pound settles, US dollar availability should increase leading to more foreign direct investment and a build-up of Egypt’s fiscal reserves which will enable it to reach its high growth potential.
We believe the currency devaluation is the catalyst that has been obstructing Egypt’s ability to regain its spot as the one of the prominent emerging markets in the Middle East. Early signs are that markets have rallied in response to the bold decision, with foreign investors moving into equities, fixed income and deposits.
The IMF’s structured programme, which requires Egypt to implement various reforms in order to receive future tranches of the loan, coupled with the country’s strong fundamentals, set Egypt up to once again become a key destination of choice for investors in 2017.
The UAE’s diverse economy has shielded the country from previous concerns about a hard landing. Banks are in a healthier position than at this time last year, and the continued development of the tourism and hospitality industry, as well as the evolution of areas such a trade and finance, have bolstered the country’s economy and provided valuable revenue streams in a low oil price environment.
We see this continuing in 2017, unabated by the impact of a new US president. Further north in Kuwait, equity markets will be driven by the government continuing to spend more of its budget than it has historically, which has positive knock-on effects for different sectors of the economy.
With an already healthy economy, Kuwait’s high fiscal reserves could position it as the GCC’s dark horse of 2017.
Regardless of the fallout from Trump’s first presidential year, the key driver of regional equity markets in 2017 will be domestic issues, rather than international politics. While volatility is expected to continue and uncertainty likely to be a mainstay in 2017, countries in the GCC are being steered by very real and important internal transitions and developments, diluting the impact of US election rhetoric on their economies.
The writer is Chief Investment Officer of MENA Equities at Franklin Templeton Investments (ME) Ltd.
