Abu Dhabi — Even as the mantra of the month remains ‘sell in May and go away’ in order to avoid the seasonal decline in stocks that typically occurs between June and October, investors are betting this summer is going to be different.
From the Opec (Organisation of Petroleum Exporting Countries) meeting in early June, the US Federal Reserve meeting two weeks later, to the Brexit vote in late June, investors are positioned for a “summer of shocks.”
In the UAE specifically, the sentiment is not very different as local investors are likely to be cautious ahead of these major meetings. And while the Federal Reserve meeting and the Brexit vote may not directly impact the UAE, they will impact US and European markets, which will have a spillover effect.
The same spillover applies to the potential Brexit and the outcome of the US presidential elections.
“I think this ‘summer of shocks’ is more of an international view but it will have local implications if the volatility is high. If there is an unexpected currency movement whether of the dollar or other major currencies, that will have repercussions in terms of rebalancing of portfolios.
That will definitely impact us (in the UAE) especially as we are part of the emerging market space. Because our markets are also now in a weak mode due to lack of drivers, I believe that we could be very suspect any negative move in international markets,” said Mohammad Yasin, managing director of the National Bank of Abu Dhabi’s Securities.
Emerging markets in favour
With international investors wary of potential shocks, they have shifted away from the US and UK markets.
According to the latest report by the Bank of America Merrill Lynch (BOAML) — titled ‘If you go down to the woods today … it will be full of bears’ — international investors have rotated into emerging markets, energy, and discretionary from the UK, US, technology, and industrial sectors.
In fact, allocation to emerging market equities turned positive for the first time in 17 months, with a net of two per cent of investors being overweight.
“One of the issues that we have today in the market is the divergence in strategy by central banks. In the US, there’s a possibility of increasing interest rates, while other [countries] are loosening, and that will lead to a stronger dollar and weaker other currencies ….
That uncertainty may force higher volatility in markets in the coming weeks compared to the stability we saw in the past three months,” NBAD’s Yasin said.
In its report, BOAML cites “quantitative failure” as the third biggest tail risk for financial markets, following the potential Brexit, and devaluation or defaults in China.
Yasin said that central bank decisions will definitely impact asset allocation strategies, which will affect investor positions in commodities, equities, and bonds.
Cash allocation increases
As a result of such uncertainty, investors are sticking to the safest bets, which are cash and gold. Cash levels are up to a high of 5.5 per cent in May from 5.4 per cent in April, with only 12 per cent of investors taking higher-than-normal risks, BOAML said.
“In our markets now, everyone is shying away from looking beyond the next two to three months because looking further than that, the uncertainty and volatility is just too high. Everyone now is trying to assess their positions … and in that, I think many will be foreign cash and similar positions, which are bonds and sukuk, and cash-generating assets with as low risk as possible,” Yasin said.
Meanwhile, Vijay Harpalani, fund manager at Al Mal Capital in Dubai, said investors have lately been favouring fixed income and money market instruments especially amid an active primary market with new sovereign and corporate issuance.
He also echoed the view on emerging markets being in the limelight.
“Relative valuation gaps between developed and emerging market valuations have increased to a point that warrants more allocation to emerging markets. On top of that, weakness in emerging markets currencies proved to be an icing on the cake,” Harpalani said.
He added that looking forward, a potential hard landing of the Chinese economy will add to the major headwinds facing the GCC, and pointed that other challenges like the Brexit and a possible interest rate hike next month are “not currently fully priced into the markets.”
But even the Brexit might not all be bad news as the BOAML report says that with the sterling seeing the second most undervalued reading on record, it is a good opportunity for traders looking to sell UK volatility or buy upside optionality.
