Dubai: GCC investors, including high networth individuals, institutional investors, family offices and sovereign wealth funds (SWFs), have been diversifying their asset allocations in favour of emerging market equities and bonds in the face of very low or negative bond yields, a rising dollar and already high US equity valuations, said Luca Paolini, chief strategist of Swiss private bank Pictet Asset Management Limited.
“Recent central bank actions have contributed on high volatility in the markets with sovereign bond yields heading to negative territory. With liquidity remaining high due to cheap money policies adopted by most central banks, equity valuations are high, especially in the US. Emerging markets are attractive in relative terms,” Paolini said.
While inflation is declining and growth is rebounding in some of the key global emerging markets such as Mexico, India and the Philippines, equities from these markets look attractive and should serve as a tactical diversification opportunity for investors from the Gulf region, he said.
The strong correlation between oil prices and the GCC markets and highly sentiment driven valuations of these markets call diversification. Pictet officials said that a number of regional wealth managers are already executing such tactical diversification strategies.
Despite the recent oil price decline, Paolini said nothing is fundamentally wrong with the GCC economies. While the prices are expected to average between $60 (Dh220.20) and $70 (Dh257) per barrel this year, with exceptionally low public debt levels, GCC’s economic growth is expected to average around 4 per cent. However, the wealth manager expects regional markets to underperform key Asian emerging markets.
Performance fees
In the context of high US equity valuations, sharp yield compression seen in developed markets and high volatility, performance is the prime benchmark for GCC investors use to retain their asset managers. “Clearly basic management fees are under pressure due to competition in the industry. But regional investors are willing to pay performance fees once again emphasising ‘performance,” Francesco Genovese said.
Pictet expects a midyear interest rate hike by the Federal reserves could jolt the markets, particularly the emerging markets. “Although current US inflation is low, a possibility of the economy slipping into deflation calls for the start of a rate hike. If the Fed doesn’t start the rate adjustment now, it will be left with little monetary policy room to deal with a potential future deflation,” said Paolini.
Pictet said a midyear rate hike is unlikely to impact GCC economies as the rise in dollar due to higher interest rate is not likely to be very sharp. Pictet expects the dollar appreciation to be limited because by the second quarter of 2015 Europe and Japan are expected to begin recovery and will start to attract some of the global fund flows.
