Quantitative easing in the euro zone will be a boon to the Middle East’s capital markets, as a global financial system awash with spare liquidity searches out high-yielding assets across the Gulf.
Starting today and for the next 19 months, both the European Central Bank and the euro zone’s 19 national central banks will seek to buy debt from counterparties in the secondary market, providing stimulus at a rate of €60 billion (Dh238.96bn) a month.
“European quantitative easing is going to be particularly positive for Dubai,” said Monica Malik, the chief economist at Abu Dhabi Commercial Bank.
“It will improve global liquidity, which is vital for Dubai because it requires considerable amounts of foreign capital for its upcoming investment programmes.”
Because Dubai’s economy is much more open than those of other Gulf economies, it is especially sensitive to changes in global investment flows, Ms Malik said.
This influx of funds will benefit Dubai’s “investment needs and corporate sector” in particular, she said. It will increase the attractiveness of initial public offerings, and would support the emirate’s growth rate.
Dubai’s real estate sector is unlikely to benefit significantly from monetary loosening in Europe, however.
“What has been positive about regulations in the UAE is that they have reduced the impact of speculative activity with transfer fees and loan-to-value caps on mortgages,” Ms Malik said.
Sanyalaksna Manibhandu, senior analyst at the National Bank of Abu Dhabi, said: “We’ve seen since 2008 that quantitative easing is positive for global liquidity and positive for the risk trade.”
With real interest rates falling, “the Emirates Interbank Offer Rate (Eibor) and the Saudi Interbank Offer Rate (Sibor) will remain low for a few months longer,” Mr Manibhandu said.
The Eibor and Sibor determine lending costs for banks, and indirectly determine the price of corporate and retail loans.
Quantitative easing is likely to have a particularly positive impact on the region’s stock markets.
“Global equity markets are in festive mood, hovering at all-time highs,” wrote analysts from Bank of America Merrill Lynch in a research note. “World stocks are up by 4 per cent so far in 2015, adding to the strong performance since March 2009”, when quantitative easing was announced in the US.
But Saudi Arabia is likely to benefit more than other Gulf bourses, Mr Manibhandu said.
That is because foreign inflows to UAE and Qatar markets, which have been included in the MSCI’s Emerging Markets Index, have already increased significantly during the previous two years.
Saudi Arabia’s Tadawul Index, which remains closed to foreign investors, except through options contracts, did not benefit from a similar inflow of cash.
Although Saudi shares are among the region’s more expensive, with an average price-to-earnings ratio of 19.3, compared to an average for the MSCI Emerging Markets Index of 12.6, investors remain keen to gain exposure to the Middle East’s largest economy. “If you are an institutional investor from outside of this region, you’ll go straight to Saudi,” Mr Manibhandu said. “If you are long on a basket of Saudi equities, you’re long on the whole region.”
The Tadawul is expected to open to foreign investors in the first half of 2015, although Saudi authorities have not yet set a specific date.
An influx of foreign funds is also likely to push yields down on regional bond markets, as investors look for assets with good rates of return.
High yields are currently easier to come by in the booming economies of the Gulf than in the depressed economies of the euro zone.
Mr Manibhandu believes that UAE bonds will benefit more than stocks, because of the long rally of local equity markets up to the end of 2014.
The positive effects of improved global liquidity will last until the US raises interest rates, Mr Manibhandu said.
This is likely to be followed by a sharp, sudden decline in investor sentiment.
“But people will then realise it won’t hurt that much,” he added.
abouyamourn@thenational.ae
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