Strong dollar to hit GCC property hard

rate hikes by the us Fed will pressurise the region’s pegged currency, given the current liquidity challenges and low economic growth rates Amer Abdul Aziz Khansaheb, president of CFA Society Emirates

dubai — If the dollar remains strong, the likeliest effect on Gulf investments would result from pressures on the GCC currency peg that would then negatively impact the real estate market, CFA Institute, the global association of investment professionals, said on Tuesday.

Around 42 per cent of respondents in an annual Middle East Societies Market Sentiment Survey released by CFA Institute felt that a stronger dollar is likely to pressurise the currency peg, which will then negatively impact the region’s real estate market.

“Investment professionals in the Middle East are conscious of developments in the US, as the new administration’s energy agenda will have global implications on oil prices and production,” said Amer Abdul Aziz Khansaheb, CFA, president of CFA Society Emirates.

Since the GCC does not have its own independent monetary policy, rate hikes by the US Federal Reserve would pressurise the region’s pegged currency, given the current liquidity challenges and low economic growth rates. Higher risk premiums and an increase in the cost of capital would also be effects resulting from such US monetary developments, Khansaheb said.

With rising concerns about the Trump administration’s protectionist policies and the potential risk this poses to trade agreements, it is the US energy agenda which will have the biggest impact on the GCC, respondents in the survey said.

The survey also revealed that the GCC healthcare industry is expected to receive the highest volume of investments in 2017 among non-oil sectors, followed by hospitality and tourism as the member states seek to increase the economic contribution of such segments.

In Saudi Arabia, respondents indicated that capital markets opening up for foreign investments is a highly important factor in easing regional liquidity shortfalls.

The GCC has seen a record volume of bond issuances over the past year, with this trend expected to continue, almost twothirds of respondents believed that bond yields in the region would increase.

Nearly 70 per cent of the members surveyed agreed that oil prices are unlikely to reach higher than $60 per barrel. NPLs (nonperforming loans), rising Fed rates and tightening liquidity conditions will continue to pose significant challenges to banks in the region, with the cost of raising capital likely to increase.

CFA society members noted that creating incentives for foreign start-ups to set up in the GCC would be the most effective way to foster entrepreneurship and a start-up ecosystem in the region, given the growing need to diversify from an oil-driven economy. The private sector will have to play a larger role in diversification efforts as governments look to realign spending.

Khansaheb said the findings from the survey suggest that the majority of respondents believe improving market transparency and accountability is key to improving trust in the UAE’s investment industry and ensuring long-term sustainable economic growth.

“The survey results reflect the discussions and debates we hope to encourage at the conference, where practitioners, leading thinkers in finance and investment, and eminent speakers will reveal insights about the future of the Middle East’s financial landscape and where the opportunities lie for investors,” he said.

Forty six per cent of respondents answered “very important” and 31 per cent answered “extremely important” when asked how important will the opening up of Saudi Arabia’s capital markets be for foreign capital inflow into the region and liquidity easing.

Some 61 per cent of the members surveyed believed that bond yields in the region would increase, 16 per cent said they would stay the same and only 11 per cent thought that yields would decrease.

When asked what the expected return from a multi-asset class portfolio (equity, bonds, cash, real estate, commodities, private equity, etc.) is likely to be over the course of the year, 48 per cent said in the region of zero to less than five per cent and 37 per cent of respondents indicated that returns would be between five and 10 per cent.

Stocks were ranked as the highest performing asset class in the region during 2017, followed by commodities, private equity, bonds, real estate and lastly cash equivalents.

— issacjohn@khaleejtimes.com