In the world of investing, challenges open doors to opportunities, according to portfolio managers.
With Brexit shaking the foundations of the European Union; reality TV star Donald Trump becoming the next United States president; and a new age of populist nationalism gaining traction in Europe, portfolio managers are navigating an increasingly uncertain world.
Such geopolitical challenges and changing client expectations will likely influence near-term investment trends in the Middle East and North Africa (MENA) region, and wealth managers have to change tack to mitigate risks, according to a panel of experts at FundForum Middle East, held on Monday (21 November) in Dubai.
Dino Kronfol, CIO, Global Sukuk and MENA Fixed Income at Franklin Templeton Middle East, said two transitional changes emerging from the recent US presidential election will have a profound impact on the region: the price of credit and the price of oil.
“The initial response to the US election had been negative, but now we are of the view that a Trump presidency is going to focus on fiscal stimulus and reflationary policies, which will affect bond prices,” Kronfol said. “However, there’s also the view that the incoming administration’s pledge to raise US oil output will continue to put pressure on crude prices.”
In a recent note to financial professionals, Franklin Templeton noted that the current period of uncertainty is the “type of environment in which active managers thrive”, as it forces them to search for long-term opportunities amid short-term disruption.
Panning for gold
This is a philosophy shared by Tarek Sakka, CEO of Ajeej Capital, a privately owned investment manager that invests in public equity markets across MENA.
“The reality is that the MENA region has been dealing with high levels of uncertainty perhaps longer than in any other parts of the world,” he said. “Investment managers have learned to adapt and become bottom-up oriented, focusing instead on the underlying companies, which is crucial, especially during challenging times.”
He cited Saudi Arabia as an example. Shrinking oil revenues, due to a protracted drop in crude prices, have prompted the government in recent months to launch an austerity drive to cut public spending, slash fuel subsidies, cancel bonuses for public sector employees and reduce ministers’ salaries by 20%.
As a result, consumers’ disposable income has also decreased. But he added a transformational change is happening in Saudi Arabia, which could open up opportunities to investors.
“This is anecdotal, but while in Saudi, I came across an Uber driver who is a Saudi national. He still works in the public sector, but he drives part-time,” Sakka said, adding that this is a sector that could potentially replace expatriates with locals.
“There are substantial challenges and significant changes in the market today. So what we try to do is during this major shift [in dynamics] we focus on companies that benefit from these changes, and industries that have significant capacity increases,” he explained.
By taking this approach, Sakka added, his company is able to explore the potential to add value, while at the same time mitigating high levels of risks.
Nadim Kabbara, Head of Research at Beirut-based FFA Private Bank, also believes that it is during uncertain times, when “active managers must not sit on their laurels”. Instead, they should focus on monitoring global trends and how those would impact the region.
As far as Brexit is concerned, Kabbara believes its effect on the MENA market will be negligible and limited only to indirect transmission channels, “largely from price developments in oil and the US dollar on account of investor sentiment, particularly for oil-exporting GCC nations,” he wrote in a recent analysis.
Investing in a climate of uncertainty
From Brexit to Trump, the world of investing has been in for a rough ride this year, but the global financial markets appear to be weathering the storm. According to Thomson Reuters, of the 455 companies in the S&P 500 that have reported earnings in the third quarter of 2016, 71% posted earnings above analyst expectations.
“In a typical quarter (since 1994), 63.5% of companies beat estimates, 15.7% match and 20.8% miss estimates. Over the past four quarters, 70% of companies beat the estimates, 9% matched and 21% missed estimates,” the report noted. “In aggregate, companies are reporting earnings that are 5.7% above estimates, which is above the 3% long-term (since 1994) average surprise factor, and above the 5% surprise factor recorded over the past four quarters.”
Charles-Henry Monchau, Head of Asset Management at SHUAA, attributes this to two main reasons: central banks’ the loose monetary policy and a stable dollar.
In an earlier comment piece, Monchau shared his perspective on how managers can position portfolio during a period of uncertainty. According to him, there are key principles that need to be followed, such as “diversification, thorough diligence when selecting instruments, as well as the attention paid to liquidity and valuations”.
Wealth managers must heed this call, if they are to rise above choppy waters.