DAVOS // The World Economic Forum got off to a gloomy start in the Alpine town of Davos, as global business leaders took stock of the deteriorating economic and financial situation since the turn of the year.
In the early sessions of the WEF’s 46th annual meeting, speaker after speaker warned of the repercussions of falling stock markets, declining world economic growth, plummeting oil prices and volatile currency markets.
The Harvard economic professor Ken Rogoff, on a panel considering how to prevent future financial shocks, said: “The new normal is a world where there is low growth and high levels of deflation, and we have to get used to that.”
Martin Sorrell, chief executive of the communications company WPP, told the same panel that the fall in the oil price last year has not had any noticeable effect on consumer demand or growth. “That’s been a permanent problem for the world since the crash of Lehman Brothers. For the past two years, the biggest companies in the world have taken a view on the global economy, and they’ve taken their money out in the form of dividends and buy-backs.”
Mr Sorrell listed the most pressing economic problems as China, oil, Saudi Arabia, the US economy, Brexit and migration. “That’s quite a list,” he added.
The billionaire American hedge fund manager Paul Singer said that “economies have been held up for way too long by central banks. Policymakers have done nothing in the way of structural reform and now we’re seeing the consequences”.”
On the collapse in energy prices, the meeting heard a pessimistic prognosis from Fatih Birol, executive director of the International Energy Agency. “The downward pressure on oil prices is likely to continue in 2016. By the end we’ll have had three years of oversupply, and I cannot see any surprise factors that might push up the price.
“What worries us most is that in the last year oil investment dropped 20 per cent, the biggest fall ever. But it will still drop by a further 16 per cent this year, we believe.”
Daniel Yergin, the Pulitzer Prize-winning energy author and vice chairman of the IHS consultancy, said: “This time last year the falling oil price was supposed to be the world’s big ‘tax cut’, but that just has not happened. For US energy firms the effect has been much more mixed. Shale companies employ 2 million people directly or indirectly and are a crucial part of the supply chain, They are hurting and it can only get worse if prices stay low. There will be a 35-40 per cent drop in energy investment by 2020, taking $1.8 trillion out of the business.
“The affect has coincided with the slowing of Chinese growth, which has brought the price down even further,” Mr Yergin added.
A rare note of optimism came from Min Zhu, deputy managing director of the IMF. “I do not think we are in a meltdown, I think it is an adjustment. The global economy will grow by between 3 and 4 per cent this year, even after the downgrades. That is still good growth,” he said.
fkane@thenational.ae
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Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
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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