Markets

Yuan seen as a safe haven in forex volatility

The Chinese currency has erased this year’s loss of as much as 1.2 per cent.

Shereen El Gazzar

April 09, 2015

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The Chinese yuan has emerged as a safe haven amid volatility in forex markets, brokers and analysts said.

Major currencies including the Australian dollar, euro and Swiss franc have experienced wild fluctuations this year, while the more stable yuan last month halted its four-month decline. The Chinese currency has erased this year’s loss of as much as 1.2 per cent, trading at 6.2053 to the US dollar yesterday after falling to as weak as 6.2763 on March 3.

Chinese politicians are expected to ensure a stable exchange rate before the International Monetary Fund starts discussing the possibility of adding the yuan to the ranks of the world’s reserve currencies next month, according to Barclays and DBS Group Holdings.

Policymakers spent an estimated $33 billion in the first quarter to halt a slide that had sent the yuan to a two-year low in March, Bloomberg News reported.

“Unlike the other currencies, the margin of the Chinese Yuan is very small in terms of going up and down,” Nour Eldeen Al Hammoury, the chief market strategist at ADS Securities, said yesterday.

“As an investor, you can put your money in the Chinese yuan and you don’t have to worry.”

Barclays analysts said this month that ahead of the IMF review, “China will refrain from devaluing the yuan”.

The Chinese currency, which became the world’s fifth most-used in December, will remain stable this year, ending at 6.23 per dollar, according to a median forecast of 58 analysts surveyed by Bloomberg.

Volatility has hit other currencies this year, unsettling foreign exchange traders in London and New York.

Switzerland’s removal of a cap on its currency in January caused the franc to soar as its central bank tried to head off anticipated quantitative easing measures in the euro zone. The franc climbed to a two-month high against the euro on April 2, with the common currency hobbled by Greece’s struggle to secure bailout funds and avert a default.

The euro has plunged about 11 per cent against the dollar this year and is the worst performer among a basket of peers. Australia’s dollar has slumped more than 20 per cent from last year’s high of 95.05 US cents in July to a low of 75.33 US cents on April 2.

Meanwhile, Mr Al Hammoury said that he does not anticipate the price of oil falling much further. He said that a final agreement with Iran on lifting sanctions by the end of June should “add stability” to regional markets or “decrease the fear” of investors that there could be further conflict in the region.

Crude prices have slumped by almost 50 per cent from peaks of about $115 per barrel last summer.

Any extra supply coming from Iran could be met by a change in policy from Opec, which has so far kept output levels steady, said Mr Al Hammoury.

“The agreement with Iran should be finished by June 30, so if Opec cuts the oil production by one million barrels and then they lift the sanctions on Iran, the market may be supplied by another one million,” he said. “At that time, we may see another emergency meeting by Opec to cut another one million. It’s very critical.”

West Texas Intermediate rose 86 cents to $51.28 a barrel in New York on Thursday and Brent crude added $1.22 to $56.77.

Abu Dhabi-based ADS Securities said it was considering opening offices in South Africa and Egypt in the next year to meet growing demand for foreign exchange and brokerage services.

“Africa is a virgin market and the potential is very high. South Africa is a possibility to start with,” said Mr Al Hammoury.

“In the region, Egypt is a very competitive market. There is a huge potential there … maybe the next thing is to go into Egypt and maybe open an office there.” ADS opened a London office this year. It also has presence in Asia in Singapore and Hong Kong. The company is planning to start a research service in English, Arabic and Chinese.

selgazzar@thenational.ae

UAE currency: the story behind the money in your pockets

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.”

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