In 2025, GCC investors will learn to look beyond Trump and tariffs for cues

2024 has been another turbulent year for global markets, impacted by fairly persistent inflation, still elevated interest rates in the Western world, and high levels of geopolitical uncertainty.

Perhaps, the two surprises towards the end of the year were China’s sharp stock rally in September amid the announcement of a government stimulus rollout, and French government bonds rising on par with those of Greece.

The GCC region could actually benefit from some of these developments. Firstly, through a persistent flow of inward immigration from wealthy individuals, as fears of wealth tax hikes rise in heavily indebted Western countries. Secondly, through growing economic integration with BRICS nations (and China in particular), which could mitigate potential risks to global trade stemming from the Trump administration.

This brings us to the topic of the big news of 2024 - November’s US election result. Global markets wait in anticipation for 2025 as Donald Trump returns to the White House, threatening to hit trading partners with a raft of new tariffs. The potential impact of Trump tariffs is unclear at this stage, but it is important to bear in mind that global trade has become decidedly less US-centric.

Of the world’s 190 countries, two-thirds trade more than twice as much as China, highlighting the broad shift in global economic significance.

While Trump’s potential tariffs dominate the headlines, the investment prospects for various regions, including the GCC, are unlikely to be defined exclusively by whether they are liked or disliked by the Trump administration.

Trade with other countries, domestic economic strength, prospects for individual companies, and valuations will remain important factors. Investors should be careful not to be carried away by news headlines and instead conduct careful due diligence on all relevant factors, especially including growth prospects relative to prices being paid for assets.

China ties to boost GCC

Ever stronger economic ties to China and other BRICS nations may benefit the UAE in 2025 and beyond. China has been the UAE’s largest trading partner for years, and the UAE is China’s largest export market and second-largest trading partner in the Middle East. Non-oil trade has increased 800-fold since 1984, and over 900 Chinese companies now operate within the UAE’s largest free zone, the DMCC.

Increasing investment and financial markets integration can also be a benefit. In October, a Hong Kong ETF listed in Saudi Arabia with a volume of $1.1 billion, following in the footsteps of the first Hong Kong ETF to list in Saudi Arabia in November 2023. These events underline the growing strength of the trade partnership between the two regions, and this is set to be a continuing trend throughout the coming years.

For the UAE, we believe that these trends may give rise to continued solid growth potential underpinned by strong economic development efforts, a growing and wealthy population, and ambitious national projects to transform the UAE and Saudi Arabia into leading economic centres.

Equities outlook

Turning to the global equities market, the US has had a very strong run in recent years, driven by the tech and AI sectors, but valuations have become stretched, especially in comparison to valuations in the Asia-Pacific and Europe.

For this reason, coupled with potential challenges stemming from the US’s high debt and budget deficit, we are positioned underweight on the US equity market, and we favour wide global and sector diversification to manage risk.

After all, nobody knows where new risks may emerge, let alone how exactly many existing challenges are resolved across the world.

We believe attractive investment opportunities often arise in less popular markets that trade at low valuations overall with high mean reversion potential, as our managers are able to uncover good quality companies with solid growth prospects at very reasonable prices when conducting careful due diligence and objective evaluations of the value of companies vs. the price paid for them regardless of their place of listing.

We would not exclude unpopular sectors and markets when screening for the best opportunities just because they might currently be out of favour.

Many investors tend to over-allocate either to their home market (home bias) or to those global markets that have done best in the recent past (recency bias), which is currently the US, with a high technology/AI concentration risk.

As part of a diversified portfolio and asset base, opportunities in the currently less popular markets of Emerging Markets, Asia-Pacific as well as Europe, should not be discounted against the backdrop of a historically high valuation gap between the US and non-US markets that we currently see.

I would not be surprised if an Emerging Markets country led the performance rankings next year instead of the United States. Those who have enjoyed strong gains from US equities may wish to consider global rebalancing from what has become a very dominant position.

As ever, past performance is not an indicator of future returns…