US Fed rate hike could positively impact some Gulf equities

The US Federal Reserve is poised to raise interest rates by 25 basis points to between 1 and 1.25 per cent, which would make it the second hike this year and the fourth since the fin­ancial crisis.

An anticipated US interest rate hike this week may be positive news for some Arabian Gulf stocks, but any gains will be overshadowed by the Qatar row that is rattling markets, experts said.

The Federal Reserve is poised to raise interest rates by 25 basis points to between 1 and 1.25 per cent, which would make it the second hike this year and the fourth since the fin­ancial crisis.

Gulf central banks usually mimic US Fed interest rate moves because all the of the region’s states apart from Kuwait peg their currencies to the dollar. The Kuwaiti dinar is linked to a basket of currencies, which is also believed to be dominated by the dollar.

Back in March, regional equities reacted positively to the interest rate hike and ensuing rise in oil prices.

This time around reaction on the markets may be a little subdued because of the political rift between Qatar and three other Gulf states, which has unsettled investors and sent Qatari shares tumbling 12.5 per cent so far this year.

“Unless there is any [Fed rate] action which is away from the forecast, then the knock-on is likely to be slight,” said Julian Bruce, the head of institutional trading at Egyptian investment bank EFG Hermes in Dubai.

“Any developments that are closer to home will probably have a greater impact than anything specifically related to Fed decisions.”

Gulf markets are also intrinsically linked to oil price movements, with some markets more sensitive to gyrations than others. Brent crude was trading up 0.84 per cent at US$48.99 per barrel in London noon trading.

“Gulf markets are probably more reactive, at this stage, to any sign of de-escalation, or otherwise, of regional geopolitics and any change in the outlook for oil price,” said Hasnain Malik, the Dubai-based head of equity research at Exotix Partners, an investment bank specialising in frontier markets.

The interest rate hike may also be already priced in, leaving little room for a surprise upswing or downswing for shares.

Still, the Gulf banking sector is set to benefit the most from any interest rate increase.

“A higher interest rate environment results in expanding net interest margins for banks as a result of a large share of non-interest bearing deposits,” said Bassel Khatoun, chief investment officer for Mena Equities at fund manager Franklin Templeton Investments.  “This creates significant upside pot­ential from continued Fed tightening.”

The rate increase will also help bank earnings because Gulf banks have a high share of US and government securities in their portfolios, said Mr Malik.

Meanwhile, the Fed tightening strengthens the dollar, and in turn regional currencies that are linked to the greenback. This could be further good news for equity markets.

“The peg between GCC currencies and the US dollar has, therefore, helped ensure that equities avoided much of the past currency volatility experienced by other emerging market economies,” said Mr Khatoun. “This characteristic makes the region attractive to foreign investors looking for equity exposure that is tied to the US dollar.”

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