Oil prices
The big event making financial headlines is falling oil prices, which have slumped to below $50 (Dh183.6) a barrel. Jessica Cook, Private Client Advisor at AES International Global Wealth Management, says that it may not have as bad an impact on the UAE as some might think.
“Everyone thinks oil prices have a direct correlation to what is going on here in the Middle East because the region is well known for oil. In fact, it doesn’t actually affect the UAE as much as it may affect other places in the region,” she says.
For Kuwait, Qatar and the UAE, the break-even point for a barrel of oil is much lower than, say, Bahrain and Oman, which means the former countries can allow the price to drop much more without being dramatically affected, she adds. The other reason for the UAE’s resilience is its diversified economy. “Dubai in particular relies more heavily on tourism, construction and real estate. Despite such a sharp drop in the price of oil, economic growth is likely to remain strong,” Cook says.
Her optimism is matched by other experts. Moody’s Investor Services says Saudi Arabia and the UAE will benefit from large non-oil sectors and sizeable external financial assets, despite slightly weaker fiscal fundamentals and higher external break-even oil prices than Kuwait and Qatar — the best placed of the six GCC economies.
Lucio Vinhas de Souza, Moody’s Managing Director, Chief Economist and author of the report on the topic, says, “The sovereigns that are best placed to withstand those challenges will be those that have the greatest policy flexibility and a wide array of counter-cyclical policy tools, including floating exchange rates and large foreign exchange reserves.”
Oil importers would be positively affected. Those that are battling high inflation and large oil subsidy bills — such as Indonesia and India — will benefit most from a lower price environment.
For China, $60 a barrel for oil would benefit private consumption and economic rebalancing and somewhat moderate the ongoing slowdown in growth.
In the US, $60 a barrel and increased domestic production would support the balance of payments and private consumption through increased spending power.
For Morocco, lower oil prices would support further energy subsidy reforms and help reduce fiscal and current account deficits.
Quantitative easing
The US Federal Reserve ended its $4.5-trillion bond-buying quantitative easing (QE) programme in October, halting a radical monetary policy introduced six years earlier to steer the world’s largest economy through the financial crisis. Meanwhile, the European Central Bank announced last week it was launching its own asset purchase, worth €60 billion (Dh247.6 billion) a month or €1.1 trillion through to the end of 2016.
“When QE stopped [in the US] the knock-on effect was that interest rates in America increased, leading to the dollar becoming stronger. This then affects UAE residents as the dirham is pegged to the dollar,” says Cook.
In its 2015 outlook Barclays outlines core macro themes and a few consensus risks. It expects the Fed to “lift off” this year, and predicts “US dollar flatteners, lower portfolio returns and US equity underweight”. It says that the market needs to price a faster pace of Fed tightening. Market expectations now are that US interest rates will start to rise sometime this year and that the dollar will remain strong vis-a-vis the other major currencies, such as the euro and the yen.
The asset management strategy unit of the private bank Pictet, however, cautions against anticipating a further rise in the US dollar. Its outlook says, “The past 12 months have seen the dollar rally to a four-year high against a basket of major world currencies as the US economy continued its recovery and the Fed brought QE to a close. By our reckoning, the currency is already considerably overvalued. Its appreciation should therefore slow in 2015.”
The European QE does not affect UAE residents that much. The dirham, pegged to the dollar, will continue to be stronger. So if UAE residents are remitting money to Europe or going there on holiday, they will find it cheaper.
GDP growth
Worldwide GDP growth is expected to rise 3.5 per cent this year and 3.7 per cent in 2016, at a slightly slower pace than previously expected, the International Monetary Fund says. Such a situation augurs well for stock markets, and analysts are naturally upbeat about equity investments.
The first theme in Barclays’ report is “underweight bonds, overweight equities”. Its advice is to stick with a balanced portfolio with modest equity overweight.
Pictet agrees. “Stocks offer greater potential than fixed income in 2015,” it says in its annual outlook.
“Also favouring equities is that, compared to bonds, they are extremely cheap.”
The private bank report adds, “Equities offer greater potential than bonds, largely on valuation grounds. Liquidity conditions should remain supportive, but uncertainty over the timing of a US interest rate hike will lead to higher volatility.”
Pictet favours certain regions over others on the equity front.
“Japanese stocks are the most appealing asset class; European equities still look attractive, particularly in local currency terms. In emerging markets, we prefer India.”
In terms of sectors it says consumer staples and other defensive sectors are expensive, but technology appears set to outperform.
Pictet’s view is that growth will remain sluggish. “Not only is the world economy troubled by a persistently weak Eurozone, a recession in Japan and slowing growth in emerging markets, but its prospects are also hostage to worrying political developments, particularly Russia’s worsening relationship with the West. Should a sharp downturn ensue this year, riskier asset classes would surely suffer while government bonds and the US dollar could add to the gains.”
Barclays is also of the view that this is the time to look to emerging markets. While these regions are not worried about US central bank policies, they come with their own challenges.
Cook says, “Over the past five years China has seen strong growth and in 2015 that will start to taper off.
“Looking further into the year, India is probably the strongest of all of the emerging markets.”
However, it is Japan that has been the focus of many economic forecasts this year. For those with an appetite for risk, the good news is that Japanese equities are the cheapest to the Japanese government bonds for at least 20 years. “Export-oriented companies stand to benefit from the weak Japanese yen, which is trading below its purchasing power parity rate for the first time ever,” Pictet says. “Second, domestic stocks should receive a strong boost from a change in investment policy at Japan’s biggest public pension fund, which is to increase its allocation to Japanese equities to 25 per cent from a current target of 12 per cent. Third, the Bank of Japan has expanded its bond purchase programme, which should prove supportive for growth and stocks.”
However, Cook sounds a note of caution. “Japan recently has been pushing for an inflationary increase, so this year it is not really seen as a stable geographic location to invest money because measures are still being put in place, although it is rebounding from 2014 weaknesses.”
