June, 2024

Global themes have local consequences in the GCC

DUBAI – At a media roundtable on May 19th, an expert from Fidelity Worldwide Investment said that emerging global themes have significant local consequences for the Gulf Cooperation Council (GCC) countries.

Tom Stevenson
Tom Stevenson

“The GCC was amongst the stand out emerging market economies over the last couple of years as global investors became more discriminate in picking the ‘winners of tomorrow’. Going forward, the region’s economies will be further supported by strong structural growth and increased government spending on infrastructure and social sectors. In this context, one does need to be aware of global themes as they do have some important local consequences”, said Tom Stevenson, Investment Director – Personal Investing at Fidelity Worldwide Investment.

Tom Stevenson continued, “One of the major global themes is the performance of the US dollar, which is expected to strengthen, particularly against emerging market currencies. As most GCC currencies are pegged to the US dollar, they stand to benefit from the strengthening US dollar in the short to medium term.”

After an extended period of weakness in the decade to 2012, the structural outlook for the US dollar is now brighter. In particular, all the key factors that were responsible for dollar weakness look to have turned in a more favourable direction. The sizeable US current account deficit has been reduced largely due to the shale energy boom, which is slashing the country’s energy import costs. The return to economic growth is helping to improve the US budgetary position and the strengthening recovery has also put the US on the verge of becoming the first major economy to effectively begin tightening monetary policy. These three key factors argue for a stronger dollar in the years ahead.

“Shale exploration has implications beyond US borders and could be a material long term threat to Middle Eastern dominance of the global energy market. Shale deposits are more diversified geographically than traditional oil and gas deposits, which are concentrated in this region. The US is far ahead of all other countries in terms of exploiting its shale reserves, so in the short run, trends there will dominate discussions. One of the most important effects might be reduced demand for other energy sources. Within the US, we have already seen lower demand for coal for electricity production. From a global perspective, greater energy independence from the world’s largest economy and the possibility of future US energy exports could put downward pressure on global energy prices”, commented Tom Stevenson.

“Oil is less vulnerable to a slowdown in Emerging Markets (and particularly China) relative to other commodities, but the shale energy story is a game changer.”

Turning to Emerging Markets, investors should take a selective approach as many countries face some structural challenges, according to Mr Stevenson,

“Local markets have performed strongly over the past year due to the improving fundamentals of the economy and the renewed interest of foreign investors. The inclusion of 19 stocks from the UAE and Qatar in the MSCI Emerging Market index this month was an indication of how much this region has developed in a short period of time.

However, the Emerging Market index is only around 11% of the Global index and the combined weight of the UAE and Qatar in the revised Emerging Market index is just above 1%, which means that the region is a mere drop in the ocean for international investors. So while being at the ground floor of this movement is indeed exciting, investors need to recognise that there are many other, more mature markets that offer more predictable returns and reduce the risk of having all of one’s proverbial eggs in one basket.”

He added, “From an investment perspective, many investors in the GCC are faced with challenges relating to asset diversification and the ‘search for yield’. Local investors are increasingly putting a greater focus on previously ignored areas such as US equities, equity income and multi-asset portfolios. We are seeing a positive outlook for equities in developed markets, and particularly US equities which is supported by improving macroeconomic fundamentals.”

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