So the US’s concerted dollar-printing programme, known as QE, has been brought to a halt. It’s a landmark moment for the post-crisis global economy and the beginning of the end of an extraordinary monetary experiment that has touched the lives and wallets of international investors the world over.
The ending itself will entail an eventual unwinding of the Fed’s balance sheet, which may or may not be as easy as the policy stance it replaces. And murmurings have already surfaced, indeed from the portals of the central bank itself, that QE4 (yet another phase of stimulus) might well be entertained, and certainly so if necessary.
Now that this monumental policy effort has ostensibly passed, albeit smoothly, everyone naturally wants to know whether stocks globally and regionally can cope without the systematic boost, to be supported instead by the kind of real economic growth that QE itself was meant to kick-start.
A glance at recent charts of the GCC bourses tells you that the recent bout of nervousness emanating from international trends hasn’t yet been overcome. Stock prices have softened a touch since recovering momentarily from the waves created by the global shakeout.
The S&P 500, meanwhile, is back near record levels, regaining a sweet spot of motivation by way of improving fundamentals but with the insurance policy of an ever-attentive Federal Reserve should something go wrong. Otherwise, the world economy is stuttering along, with China and the EU presenting notable concerns.
On balance, investors are inclined to stay in the market, believing governments will endorse yet further liquidity-providing actions if necessary, but also beguiled by the lack of alternatives and the running yield to be harvested in stocks.
What does the current interim say about the Gulf’s situation, seemingly compromised by lower oil prices for the moment?
Al Masah’s latest weekly investment report advised clearly that things have changed, as “the markets were genuinely spooked”, trading fearfully. In a classic blueprint of how the local indices depend substantially on overseas trends and key influences, the note observed that “with global markets and oil teetering, regional markets were in a highly correlated move towards the downside”.
Caution is the watchword now, evidently. Whereas “the sell-off has serious fundamental and economic reasons behind it”, the modest rebound suggested both a support level technically and the distinct possibility that it might be tested.
For the medium term, though, the mood music seems encouraging, more than simply a reluctance to give up on a party atmosphere. A slew of reports in the past week or so has indicated as much, including the latest survey of regional fund managers by Reuters.
That revealed an inclination to utilise the recent retreat by stocks for accumulation at the lower implied valuations. It also claimed history suggests only a low correlation between oil prices and market performance ‘overall’, measured at just 0.36 per cent in the past decade for Saudi Arabia’s Tadawul index.
Invesco’s latest Middle East Asset Management Study, meanwhile, offers a number of pointers to the same effect too.
Firstly, in particular, GCC investors target high returns relative to international norms, at 9.6 per cent, using some 20 per cent leverage in their portfolios. Regional stocks, evidently, have that appeal, relative to cash deposits especially, but also to fixed-income, which has otherwise become attractive internationally, being both relatively safe and liable to perform well enough in a disinflationary post-crisis environment.
Secondly, GCC locals are oriented to stocks in pursuit of short-term returns, which may not be ideal from the point of view of healthy markets structurally over the long term, but, according to Invesco can reasonably “be explained by considering a holistic view” of their personal finances. Namely, a high-risk appetite can apply alongside a predominant presence still [of around three-quarters of disposable income] in low-risk banking products.
Thirdly, the region’s markets are steadily attracting overseas funds. Invesco says “for Western expatriates there has been a four-year trend towards increasing local allocations from an average of 2 per cent in 2011 to 13 per cent in 2014”, respondents becoming “more comfortable” with that exposure.
Another interesting study, published recently by Mergermarket, calls upon certain, very well established themes as bedrocks for investor expectations of the region. The accompanying table shows particular aspirations for both regional economic integration and non-oil diversification in leading the way forward.
Equally apparent, though, is that it is not the oil-price outlook that shapes the favourable outlook. Notably, even less faith is being placed in the underpinning or stimulus of US monetary policy, despite its crucial role in getting the world economy back into motion since the global financial crisis, particularly as other blocs have so conspicuously disappointed.
For the Gulf, thus, no special or different strategies are required for investors to have their hopes fulfilled — only delivery on best, previously stated intentions.
