A top NBAD executive yesterday ruled out spectacular gains in regional equity markets this year amid expectations of slower economic growth given the steep decline in oil prices.
“At this price of oil it’s difficult to be bullish,” said Gary Dugan, National Bank of Abu Dhabi’s global wealth chief investment officer and head of investment strategy. “The GCC has a period of adjustment to lower oil prices. The corporates are starting to feel it and we’ve only had it for a matter of weeks. If it goes on for months and it doesn’t seem to go away as a problem then companies will have to adjust.”
Stocks in the Arabian Gulf took a hammering in December as the price of crude oil plummeted more than 30 per cent, with many benchmark equity indexes including Dubai dropping just as much before making a partial recovery. As a result, Dubai’s main gauge pared its 2014 gains to 12 per cent and so far this year has dropped 1.4 per cent.
The UAE is the world's eighth-biggest oil producer and the Federal Government funds more than 60 per cent of its budget from crude exports, while in neighbouring Saudi Arabia, the world's largest oil exporter, the reliance on oil is even greater.
The bank’s global asset management department is also not that bullish about global equities either. It recently reduced its portfolio’s exposure to that asset class down to 35 per cent from 40 per cent on concern that the global economy is growing at a lacklustre rate amid falling prices and mounting problems in Europe’s economy as Greece teeters on the edge of exiting the monetary bloc.
The rest of Mr Dugan’s portfolio comprises 35 per cent fixed income, 15 per cent so-called absolute return hedge funds, 10 per cent gold and 5 per cent cash.
The huge six-year rally in global equities may be coming to an end as concerns mount that low interest rates and monetary stimulus have failed to stoke growth and are instead encouraging deflation, or falling prices. The drop in oil has made matters worse as energy companies will experience slower growth, and this is likely to have a knock-on effect on other industries.
“The easy money has been made in financial markets,” said Mr Dugan. “Since the lows of 2009, US equities have returned 245 per cent and US 10-year government bonds have returned 30 per cent. Recent sharp falls in the oil price only add to the volatility.”
The drop in crude was first triggered by slowing demand from big emerging markets such as China during the second half of 2014 and an increase in energy production from the United States. The plunge accelerated in November, when Opec, which controls 40 per cent of the world’s oil exports, refused to cut supply. Since last June, crude prices have shed 60 per cent.
The World Bank this month said the global economy resembles a train pulled by a single engine, the United States, with other regions dragging.
The Washington-based lender cut its 2015 forecast to 3 per cent from 3.4 per cent, reduced projections for the euro zone and Japan, and predicted a 2.9 per cent slump in Russia.
Instead of equities, NBAD is advising its clients to increase exposure to gold and high-yielding global bonds to protect wealth amid a low inflation environment, said Mr Dugan.
India and Egypt are among the geographies that NBAD likes within world equities as those countries are net importers of oil and their public finances will be helped by lower crude prices. The bank is also bullish on technology and healthcare stocks globally.
mkassem@thenational.ae
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
