RIYADH: Tensions are on the rise in Eastern Europe, the place a full-blown warfare is going down between Russia and Ukraine, backed by Western nations.
The battle and sanctions have impacted Russian exports, and a brand new ban on Russian oil imports by the US and the UK is making issues worse for Moscow. In addition, entry to foreign currency is restricted, and entry to the SWIFT system is constrained for a number of Russian banks.
“Overall, sanctions that have been announced are broader in scope than initially expected. The scope of the sanctions, however, is likely to have an impact in particular on the Russian Central Bank,” stated Christian Kock, director of analysis on the Gulf Research Center, in an interview with Arab News.
This is having ripple results on world capital and commodity markets. European markets have been essentially the most hit when the London inventory market suffered its greatest weekly losses in the primary week of March for the reason that onset of COVID-19 in March 2020.
As it continues, the Ukraine disaster is prone to preserve shaping monetary markets’ tendencies. Yet the GCC has a greater probability of weathering the storm, clarify consultants interviewed by Arab News.
“As the Federal Reserve is trying to play catch-up and fight high and persistent inflation, stagflation fears are arising in the global economy,” stated Ali El-Adou, head of asset administration at Daman Investments, in Dubai.
Global markets have strongly corrected, aside from vitality and commodity shares, added Jaap Meijer, head of analysis at Arqaam Capital in Dubai.
At the fastened earnings degree, “high-yield bonds credit spreads have widened sharply,” added Meijer. Credit spreads are likely to widen throughout occasions of monetary uncertainty, when buyers search refuge in what is called protected haven property, equivalent to US treasuries and different sovereign devices.
“Higher oil prices have also improved the credit outlook of countries such as Oman and Bahrain,” added Meijer.
In Egypt, credit score spreads have widened as nicely through the disaster, noticed Meijer. The Arqaam head of analysis expects rising wheat and meals costs, gasoline prices, and a failed T-bill public sale to end result in a quicker than anticipated charge hike by the Central Bank of Egypt.
“We expect it to follow with a rate hike, a week after the US Fed interest rate rise. Inflation is likely to potentially exceed the upper level of its 5-9 percent target,” added Meijer.
“Yet higher interest rates will not have a material effect on economic growth as private credit extension is moderate, while the government targets a primary surplus of 2 percent,” he predicted.
El-Adou expects rising market sovereign spreads to maintain widening a bit earlier than pulling again, as financial insurance policies contractions dampen the prospects of credit score unfold narrowing considerably in the interim.
He believes that rising markets corporates can maintain up higher on a relative foundation towards rising charges because of the structural shorter length, restricted web financing wants and sturdy standalone fundamentals (values).
Investors ought to keep obese on rising market sovereign debt, sustaining a excessive yield bias, advisable El-Adou, with a watch to scale back unfold retracement.
Both consultants imagine commodities to be strong investments.
“We remain constructive on the commodity sector in the GCC. Higher gas prices have lifted the cost price of European producers of urea and aluminum, while the energy prices for the GCC players remain regulated. This will result in a significant widening in net profit margins for the sector,” stated Meijer.
Pressure on oil value
Given that OPEC+ is sticking to its month-to-month output growth of 0.4 million barrels per day for April, and the Kuwait manufacturing has been disrupted for upkeep causes, whereas Russia’s exports have been severely hampered, Meijer expects additional upward strain on oil costs.
That is even though IEA member nations have made 60 million barrels of oil obtainable available on the market in the wake of the Ukraine disaster.
On the fairness facet, El-Adou emphasised that a number of approaches may also help buyers face unsure occasions.
“Maintaining sizable cash allows to ride through the volatility tied to geopolitics, inflation, and rate hike uncertainty and to add oversold names opportunistically,” he suggested. An oversold asset is an asset that has traded decrease at a value however has the potential for a big value rise.
The head of asset administration at Daman Investments warned that one ought to keep away from long-duration know-how names, regardless of drops in worth from their 52-week highs, making them seem interesting. He additionally most well-liked publicity to high quality know-how that exhibits the power to generate sturdy money stream.
GCC higher positioned
In phrases of areas, El-Adou stated that he downgrades EU shares to underweight resulting from geopolitical threats. This applies extra particularly to Eastern Europe.
MENA equities stay engaging regardless of the chaos prevailing on the worldwide scene. “One should keep a high exposure to the GCC equities as the region will benefit from high oil and gas prices, leading to a decline in equity risk premium. This will be justifying current high valuations,” stated El-Adou.
For Meijer, the GCC markets at the moment are appearing as a protected haven, as fairness markets have a optimistic correlation of 35 p.c to grease costs.
He added that regional corporations uncovered to urea and aluminum are anticipated to realize from world provide facet points on elevated gasoline costs and shortages.
In addition, GCC banks are weathering the Ukraine disaster, because of excessive oil costs in their dwelling nations.
Meijer stated he stays impartial to optimistic on the GCC banks, as he expects larger rates of interest from the US Fed, beginning subsequent month, with interbank charges in Saudi Arabia having sharply elevated.
“However, we are watching the rate expectations closely, and the impact of the expected US Fed tightening cycle as well as the Ukraine crisis, given that the US Fed has turned slightly more dovish,” stated Meijer.
He underlined that oil revenues are partly reinjected in the UAE, explaining ample liquidity in the home system.
However, in Saudi Arabia, the scenario is barely totally different, provided that oil receipts are transferred to the sovereign wealth fund, which continues to construct its worldwide funding portfolio. “With high credit growth, this has tightened the liquidity in the banking system, which resulted in sharply higher interbank rates,” stated Meijer.
The Ukraine disaster will take weeks, if not months, earlier than an answer arises. In the meantime, the GCC nations seem like higher positioned than others to sail by means of the difficult waters forward.