INVESTMENT TIPS FOR GULF INVESTORS
They should divert some of their funds into Europe, especially infrastructure
In the current environment it is more important than ever to identify growth opportunities early, while mitigating portfolio risks. These are the Top 10 investment tips for Gulf investors in the second-half of 2021:
Stay invested in risk assets
The strong macroeconomic recovery and stimulus are supporting risk assets, especially those sensitive to the economic cycle. While macro and policy momentum is likely to tail off into 2022, this stage of the cycle favours equities over bonds, as long as corporate earnings remain robust and valuations attractive.
Continuation of outperformance
This environment of decent growth with transitory inflation points to high single-digit total returns over the coming year, with possible volatility in response to evolving US monetary policy. Valuation levels will remain challenged by rising yields, but we still see stronger earnings.
This scenario supports cheap, recovering equity sectors, particularly within energy, financials and automakers.
Preference for European, UK equities
We concentrate our overweight equity allocations in economically sensitive panEuropean stocks. These are where we see the greatest likely benefits from economic re-openings, an acceleration in relative earnings momentum as well as attractive valuations. Eurozone and UK equities still trade at relatively cheap multiples, despite their exposures to both the global recovery and the reflation themes.
Rising yields
Over the next 12-to-18 months, we expect long-term government bond yields to rise gradually as economic conditions normalise. With the Fed unlikely to tighten monetary policy before mid-2023, we expect these rises to be visible initially in long-dated yields, which should lead to a steepening of the yield curve.
Use carry strategies
Despite a recent tightening in credit spreads, we continue to see value in carry strategies, high-yield and hard currency emerging market bonds. We continue to favour spread risk over duration risk, with Chinese debt in renminbi offering useful diversification, solid fundamentals, good credit quality and an attractive yield, along with a low correlation to US rates.
We also like emerging market corporate bonds, which should benefit from improving economic fundamentals and lower leverage, while offering decent yields and spreads.
Dollar to depreciate
Despite the Fed’s increase in interest rate projections, we still expect moderate US dollar depreciation in the second-half. We base this forecast first on the dollar remaining 20 per cent overvalued by our estimates and, second, ongoing improvements in global activity and trade, both of which historically trigger dollar weakness. In particular, a rotation in growth towards Europe, re-opening economies in the region and support from the EU’s ‘Next Generation’ funds should directly underpin the euro with improved sentiment and increasing portfolio flows.
A more hawkish Fed, and/or any delay in European re-openings from Covid’s latest ‘delta’ variant, would undermine this outlook.
Despite a recent tightening in credit spreads, we continue to see value in carry strategies, highyield and hard currency emerging market bonds.
Renminbi strength
We remain positive on the Chinese renminbi, given still positive portfolio flows and solid exports. Recently increased foreign currency reserve requirements from the People’s Bank of China suggest that they aim to cool, rather than reverse the pace of renminbi appreciation. We believe this reflects the large build-up of onshore currency deposits in the past year, which could be reconverted into renminbi.
Gold to trade lower
We remain underweight gold as rising yields and healthy risk appetite should continue in line with the economic recovery. Although inflationary pressures pushed gold prices higher in the second quarter of 2021, the recent shift in the Fed’s stance offered a reminder that real rates remain the major driver for gold in the recovery.