No reason for GCC investors to panic

Dubai: Global investor reactions to the dramatic result of UK referendum to leave the European Union has unnerved GCC investors resulting decline in stock prices across all GCC markets. Analysts say the initial reactions have been panic driven and the market is slowly coming out of the anxiety bout.

On the first trading day after the Brexit vote GCC markets remained relatively unscathed except for UAE markets. Dubai index lost 3.3 per cent while Abu Dhabi lost 1.8 per cent. Dubai being largely a service economy driven by trade & services, tourism and real estate witnessed a fall as British pound lost 7.2 per cent in value against the UAE dirham.

“GCC equities may continue to fall in the short-term, in line with global trends, as risk aversion engulfs investor sentiments. However, we feel the direct impact of Brexit is minimal on GCC equities as their earnings prospects are little affected by the event. As a result, we expect equities to gradually recover as their movements are largely dictated by domestic factors and oil prices, Marmore Mena Intelligence wrote in a note.

Although the impact on local markets have been relatively sober following the vote, in the weeks leading up to the vote, the changing sentiment towards a leave vote saw the UK equity market weaken, with GCC investors fleeing towards safe havens. “It is almost inevitable that this sell-off will continue as we enter a period of extreme volatility and uncertainty. We could see markets overreact in the short-term, followed by a snapback as investors digest the news. As history has shown, usually the right thing to do — and often the hardest thing for an investor to do — is avoid the temptation to change their portfolio and sell when prices are already depressed,” said Brendan Dolan, regional director for the Middle East and Africa, Old Mutual International, part of Old Mutual Wealth.

While the GCC stock market investors seem to be taking the exit vote with lesser amount of anxiety compared to similar previous global events such as the devaluation of the yuan and Greek crisis last year, other asset classes like real estate are likely to be impacted.

Manageable

In comparison to equities, the Dubai real estate is expected to face some pressure from decline in the value of pound. Economists say the overall impact will be limited and manageable in the GCC as compared to other regions such as Emerging Europe, and Asia Pacific. “The main two channels that are relevant to the GCC are the impact of Brexit on global oil prices and the UK and euro exchange rates. First, average oil prices for 2016 will be lower now than with no exit from the EU, say an average of $43 (Dh157.81) per barrel instead of $47 per barrel in 2016. The reason for this is slightly lower global demand due to weaker economic activity in the EU. Second, a more depreciated British pound and euro would increase the overvaluation of GCC currencies and weaken demand for real estate, particularly in the UAE, and perhaps less tourist arrivals from the UK and the Euro Area,” said Dr Garbis Iradian, chief economist of Institute of International Finance, Middle East & Africa region.

Investor’s feared the depreciation of pound against the dirham would affect real estate investments and tourist’s inflow from Britain. Among non-GCC investors in Dubai, after Indians nationals, British nationals had invested Dh10billion in Dubai real estate in 2015 according to data from Dubai Land Department. Tourism inflow from Britain to the GCC would also get impacted on account of the depreciating GBP.

Although Britain’s exit from EU has added an element of uncertainty that could further dampen global economic growth by delaying capital expenditures and sapping global consumer confidence, analysts say the event’s impact on oil would be minimal since Britain consumes only 1.6 per cent of global consumption and ranks 15 among global consumers. The more serious impact would be if there is contagion to the rest of the EU. Further, as capital shifts into safe haven assets such as US treasuries, it would lead to further strengthening of US dollar.

UK real estate

Realty agents and analysts say the exit vote would end the housing boom in Britain bringing the price rises to an abrupt halt. Realty transactions are bound to be thin as buyers would prefer to “wait and watch”. Commercial real estate, especially office spaces, would be hit as multinational organisations reassess their strategy to stay in London, which so far had served as a gateway for EU markets.

Sovereign Wealth Funds (SWFs) and HNIs in GCC are known to invest heavily in London’s real estate. For instance, Investors from the UAE accounted for more than 20 per cent of buy-to-let property sales in the UK in 2015. Qatar Investment Authority (QIA) is among the high-profile investors in London real estate, snapping up landmarks such as the Shard skyscraper, Harrods department store and Olympic Village. Value of their holdings would be marked down due to the fall in pound value. The ensuing uncertainty would lead to investors demanding a premium, subsequently, the prices could further decline.

Attractive

Analysts say a steep fall in real estate prices in Britain (especially London) may also see fresh investments from GCC into the country on account of bottom fishing. On the other hand, GCC investments into the UK may begin to look much more attractive considering the exceptionally weak sterling levels that might be seen, representing something of a once in a lifetime opportunity to purchase UK assets. “Unlike other regions GCC investments into the UK are for most part not made with the motive of accessing European markets, but rather they are stand-alone investments made in their own right, in areas such as real estate and hospitality,” said Tim Fox, chief economist of Emirates NBD in a note.