The year 2015 can be marked by increased volatility across asset classes on the back of series of events that unfolded from possible “Grexit” from the EU to China’s sudden devaluation, and to end the year with Fed’s policy lift-off.

The rapidly changing themes during the year also took investors by storm, as before they could absorb one, the next one was already looming in the background. The year also witnessed depletion of global forex reserves held by central banks, falling from a peak of around $12 trillion (Dh44 trillion) in the beginning of the year to $11.25 trillion, the largest drop in decades.

Heightened concerns over Chinese growth has been the most important event due to the magnitude of its contribution to world economic growth, particularly those commodity-exporting economies with large amounts of dollar-dominated debt and a reliance on Chinese demand.

For the Mena region, the decline in oil prices was the most important development, both for the economy and the capital markets accompanied with the global factors. The collapse in oil prices that started since the second half of 2014 further intensified during the second half of 2015, mainly due to the expected slowdown in global growth coupled with rising output levels from Opec members and an anticipated increase in production of US shale.

Growth trajectory

Lower oil prices meant dwindling government revenues and burgeoning state deficits; both would impact governments’ ability to fund ambitious spending programmes and impact the economic growth trajectory of the region. Additionally, the region was also impacted by geopolitical tensions, which kept resurfacing (albeit over different events) throughout the year, shaking investor confidence especially when the markets were beginning to absorb the low oil price environment.

The GCC equity markets went through a rollercoaster ride and despite a positive start of the year, crumbled to multi-year lows in the latter half of 2015. The first couple of weeks of 2016 also witnessed a similar fate for the equity markets.

Going forward, equity markets will continue to remain volatile throughout the first half of 2016 and start stabilising — if not rebound — during the second half. Markets will look for stability in oil prices and initiatives by regional governments to stimulate economic growth to boost investor confidence and witness a sharp recovery in the second half.

Investors will utilise this period to focus on sectors and stocks that are fundamentally strong and part of governments’ agenda as well as driven by domestic factors rather than global factors. Additionally, smart money will chase companies with a sound business model, healthy balance sheet and low gearing ratios that have been battered due to the ongoing sell-off in the regional equity markets.

Further momentum

The GCC bond market was dominated by the public sector, especially Saudi Arabia, to fund its burgeoning budget deficit arising from lower oil prices. The issuance in 2016 will gain further momentum as both public and private sector will continue to tap the debt market as an alternative funding avenue, especially when liquidity remains tight within conventional banks.

Given the increased volatility in the equity markets, investors will turn their focus on bonds and sukuks as a safe heaven and with the aim to earn fixed returns in an uncertain global environment. In the fixed income space, markets are likely to see a rise in number of sukuk issuances compared to bonds as investors prefer Sharia-complaint rather than investing in conventional bonds.

The real estate sector is likely to remain under pressure this year as selling pressure will further intensify, especially from foreign investors. The stronger dollar will continue to benefit the foreign investors who would like to sell and capitalise on the currency differential in their respective countries as the GCC is mostly pegged to the dollar.

According to the most recent announcement from Rera (Real Estate Regulatory Agency), they are also expecting a decline in rentals in Dubai, which is likely to intensify the downward pressure on the real estate prices.

Private equity activity remained subdued in the GCC, primarily due to the uncertain global economic environment and depressed oil prices. Having said that, sectors that were part of government’s agenda and consumption-driven continued to witness investor interest during 2015.

Going forward, a similar trend will be seen in 2016 as the long term story of the region remains intact on the back of governments’ reform agenda and five-year plans. Additionally, investors will capitalise on the slowdown to accumulate assets at reasonable valuation in other economic sectors.

Gradual improvement

Going forward, 2016 should be viewed as two halves, as the first half will continue to witness increased volatility on the back of key risks that emerged during the last quarter of 2015. However, the second half will witness a gradual improvement in sentiments as investors will get clarity on two important events that have led to global uncertainty.

First, the failure or success of US economy to absorb higher interests and, second, the impact of policy measures on Chinese economic recovery. Volatility is going to stay, hence investors will have to adjust and utilise it to gradually build long term portfolios.

For the GCC, 2016 might be the year of consolidation as the markets have already factored the lower oil prices and its subsequent impact on regional economies. The regional capital markets have been one of the worst performing markets globally in 2015 and 2016 (first two weeks).

But it seems they are currently discounting the initiatives taken by the governments to reduce state burden and maintain an ambitious spending plans to boost economic activity. Hence, the current market environment provides opportunities for investors, especially long-term investments.

Additionally, government measures to boost non-oil revenues and rebound/stabilisation in oil prices will act as a catalyst for recovery in regional equity markets.

The writer is Founder and CEO of Al Masah Capital.