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RIYADH: Tensions are rising in Eastern Europe, where a full-scale war is unfolding between Russia and Ukraine, backed by Western countries.
The conflict and sanctions have impacted Russian exports, and a new ban on Russian oil imports by the US and UK is making things worse for Moscow. In addition, access to foreign currencies is limited and access to the SWIFT system is limited for several Russian banks.
“Overall, the sanctions that have been announced are broader in scope than originally anticipated. The scope of the sanctions, however, is likely to impact the Russian Central Bank in particular,” Christian Kock, research director at the Gulf Research Center, said in an interview with Arab News.
This has ripple effects on global capital and commodity markets. European markets were hit hardest when the London stock market suffered its biggest weekly losses in the first week of March since COVID-19 began in March 2020.
As it unfolds, the Ukrainian crisis should continue to shape financial market trends. Still, the GCC has a better chance of weathering the storm, say experts interviewed by Arab News.
“As the Federal Reserve tries to catch up and tackle persistently high inflation, fears of stagflation are looming in the global economy,” said Ali El-Adou, head of asset management at Daman Investments. , to Dubai.
Global markets corrected sharply, with the exception of energy stocks and commodities, added Jaap Meijer, head of research at Arqaam Capital in Dubai.
At the fixed-income level, “high-yield bond credit spreads have widened significantly,” Meijer added. Credit spreads tend to widen during times of financial uncertainty, when investors seek refuge in so-called safe-haven assets, such as US Treasuries and other sovereign instruments.
“Rising oil prices have also improved the credit outlook of countries like Oman and Bahrain,” Meijer added.
In Egypt, credit spreads also widened during the crisis, Meijer observed. Arqaam’s head of research expects rising wheat and food prices, fuel costs and a failed treasury auction to drive rates higher faster than expected by the Central Bank of Egypt.
“We expect it to follow with a rate hike, a week after the US Fed raised interest rates. Inflation is likely to rise above its upper target level of 5-9%” , added Meijer.
“Yet higher interest rates will not have a significant effect on economic growth as the extension of private credit is moderate, while the government is aiming for a primary surplus of 2%,” he said. predicted.
El-Adou expects emerging market sovereign spreads to continue to widen before falling, as monetary policy contractions dampen the outlook for a significant tightening in credit spreads for the time being.
He believes that emerging market companies may be more resilient on a relative basis to rising rates due to shorter structural duration, limited net funding needs and strong standalone fundamentals (values).
Investors should remain overweight emerging market sovereign debt, maintaining a high-yield bias, El-Adou recommended, with a view to reducing spread retracement.
Both experts believe that commodities are solid investments.
“We remain constructive on the commodities sector in the GCC. The rise in gas prices has pushed up the cost price of European urea and aluminum producers, while energy prices for GCC players remain regulated. This will result in a significant widening of net profit margins for the sector,” Meijer said.
Oil price pressure
Given that OPEC+ is sticking to its monthly production expansion of 0.4 million barrels per day for April, and Kuwait’s production has been halted for maintenance, while exports from the Russia have been severely hampered, Meijer expects further upward pressure on oil prices.
This is despite the fact that IEA member countries have made 60 million barrels of oil available on the market following the Ukrainian crisis.
On the equity side, El-Adou pointed out that several approaches can help investors weather uncertain times.
“Maintaining ample liquidity allows you to overcome volatility related to geopolitics, inflation and the uncertainty of rising rates and to add oversold names in an opportunistic way,” he advised. An oversold asset is one that has traded lower in price but has the potential for a significant price increase.
The head of asset management at Daman Investments warned that long-dated tech stocks should be avoided, despite declines in value from their 52-week highs making them attractive. He also preferred exposure to quality technology that shows the ability to generate strong cash flow.
GCC better positioned
In terms of regions, El-Adou said he was downgrading EU stocks to underweight due to geopolitical threats. This applies more specifically to Eastern Europe.
MENA equities remain attractive despite the chaos that reigns on the international scene. “It is worth keeping a high exposure to GCC equities as the region will benefit from high oil and gas prices, which will lower the equity risk premium. This will justify the current high valuations,” El-Adou said.
For Meijer, GCC markets now act as a safe haven, as equity markets have a 35% positive correlation with oil prices.
He added that regional companies with exposure to urea and aluminum are expected to benefit from global supply issues related to high gas prices and shortages.
Moreover, GCC banks are weathering the Ukrainian crisis, thanks to high oil prices in their home country.
Meijer said he remained neutral to positive on GCC banks as he expects an interest rate hike from the US Fed starting next month as interbank rates in Saudi Arabia rose sharply.
“However, we are closely watching rate expectations and the impact of the expected US Fed tightening cycle as well as the Ukraine crisis, as the US Fed has become slightly more dovish,” Meijer said.
He pointed out that oil revenues are partly reinjected into the UAE, explaining the abundance of liquidity in the national system.
However, in Saudi Arabia, the situation is slightly different, as oil revenues are transferred to the sovereign wealth fund, which continues to build its international investment portfolio. “Along with strong credit growth, this has tightened liquidity in the banking system, which has led to a sharp rise in interbank rates,” Meijer said.
The Ukrainian crisis will take weeks, if not months, before a solution appears. In the meantime, the GCC countries seem to be better placed than others to navigate the tough waters ahead.