THE recent fluctuations markets dedicated to finance and raw materials due to the coronavirus pandemic have scared away some investors while many experts have difficulty predicting what their floor level will be, what the recovery will look like and how long it will take. will take. Economists believe that after the crisis, the trend will be towards relocation and businesses will reap fewer profits and be more in debt. And this while the International Monetary Fund indicated that this year, the world would probably experience its worst recession since the Great Depression with GDP contracting by 3%.
The Middle East region is particularly vulnerable to the evolution of oil prices which recently fell below zero for the first time in 21 years. Which, added to the coronavirus pandemic, has pushed the major economies of the Arab world to commit to recovery measures worth tens of billions of dollars. But what are the growth prospects? And what could be the collateral damage of the global slowdown for these regional economies linked to the dollar?
“Towards a completely different world in terms of economy and financial markets”
To find out more, from Abu Dhabi, we contacted Amro Zakaria Abdu, a markets specialist who advises private clients and financial institutions.
Rebecca McLaughlin-Eastham, euronews:
“Can this crisis change investor habits? Should we expect a new financial landscape?
Amro Zakaria Abdu, co-founder of Market Trader Academy:
“Absolutely. I think we are moving towards a widening gap between the world of finance and economics. They should be related, but they are not. There will be more financialization, governments will own more of the economy simply because they are injecting a lot of money into their economies to revive them. It will also widen the disparities between rich and poor, unfortunately, because all that stimulus money is dedicated to capital markets and not everyone owns stocks or bonds... So when we get out of all that, we will be in a totally different world in terms of economy and financial markets.”
Rebecca McLaughlin-Eastham:
“Let me ask you a direct question: as a small investor, what would you do right now? Would you buy or sell? If purchased, what asset class would you put your money in? Stocks, bonds, gold?”
Amro Zakaria Abdu:
“There is a new category called ‘stay-at-home stocks’ : it's basically actions of companies whose technologies, mainly, allow us to improve our daily lives in confinement or to work as usual from home. These are tools like Zoom for example which has seen growth of 106% since the start of the year. There is also Microsoft and Amazon which has just reached a record. Same thing for Alibaba. So all these companies will have very good results. Regarding gold, right now, –forgive me for the pun - it's a fairy tale “Goldilocks”: all indicators show a typical uptrend in the price of gold. Usually, gold appreciates in times of uncertainty. I think the ounce will reach $1800 this year and probably over the next twelve months its price will reach a new record.”
“The United Arab Emirates in a better position compared to others in the region”
Rebecca McLaughlin-Eastham:
“What is your average price forecast for oil? And what will it mean for economies especially in this region looking to balance their budgets?”
Amro Zakaria Abdu:
“I do not expect an upcoming recovery in oil, at least regarding its price, for two reasons. The first is the fact that production has been so strong in the past. Today, China has reserves of around 1.2 billion barrels compared to 900 million before the outbreak of the pandemic. The second reason is –I believe – the fact that after this pandemic, the economy will no longer be the same. So I don't think demand can quickly return to its previous level.”
Rebecca McLaughlin-Eastham:
“The International Monetary Fund has forecast a contraction of 3.5% in GDP for the United Arab Emirates this year. Is this realistic given the current situation and the economic outlook for next year? What do you think?”
Amro Zakaria Abdu:
“I think this is the most optimistic scenario, I would say. Overall, the indicators will be much worse, at least for the rest of this year. For the economies of the Gulf Cooperation Council countries which are generally dependent on oil with a runoff effect, I think it will take them longer than others to recover. As for the United Arab Emirates, it is probably the country that is in the best position compared to the others because its economy is much more complex. Each stimulus action creates a more global ripple effect.”
“There will need to be some form of joint borrowing in the EU”
Rebecca McLaughlin-Eastham:
“Countries like Germany and the Netherlands are clearly detractors of so-called “coronabonds”. Are they right to oppose this idea of pooling national debts ? Or is this a good idea for the European Union in your opinion?”
Amro Zakaria Abdu:
“I believe that one day or another they will have to resort to a form of joint borrowing in Europe, simply because Italy and Spain for example will not be able to access capital markets like the Netherlands and Germany. Germany can now call on the markets at a negative interest rate or with a negative return. By comparison, Italy is almost 2%, 200 basis points higher than Germany. So the danger is that we find ourselves in the Greek situation, but this time with Italy the economy and debt are much, much bigger. And the problem that will then arise is, I fear, that the nationalist movements in Italy will gain importance and we have seen what happened with Brexit. So Europeans will have to resolve to adopt a plan with shared responsibility as with these obligations. Whether they are called “coronabonds” or not, I believe it is a good opportunity to equip ourselves with this tool.”
Rebecca McLaughlin-Eastham:
“Restarting European economies obviously represents a considerable task. Governments are facing stimulus measures that are costing them more and more, unemployment is increasing, businesses are going bankrupt. This is a delicate question, but in your opinion when can things return to normal economically?”
Amro Zakaria Abdu:
“It's likely that the fourth quarter of this year will be the most realistic deadline because again, it's unclear when this will all be over. The fourth quarter or first of 2021 will likely be the time when all the engines of the economy have sort of started spinning again. I doubt that before that there will be real economic growth in Europe because you know, we have so much to sort out.”
The good days (future) of the Kuwait Stock Exchange
When a “border market” in the region rises into the category of “emerging market”, it is an event. And the Kuwait Stock Exchange, one of the oldest in the Middle East, was heading there before the Covid-19 pandemic broke out.
Since then, the value of his index has been impacted and he has also had to cash in the announcement from Morgan Stanley Capital International (MSCI) in April to postpone its transition from the category of “border market” to that of “emerging market” due to operational issues related to the pandemic. The date of this change of status is currently unknown, it could take place around November according to the American company.
A “border market” is considered relatively small and illiquid. Factors which often make it less accessible to investors. The status of “emerging market” implies that it is moving from a closed market system to a more open market against a backdrop of economic reforms according to Investopedia. This category includes, for example, Egypt, the United Arab Emirates and Saudi Arabia. It is just below the highest level: that of “developed market” which is associated with better levels of financial transparency and efficiency and greater openness to foreign investors.
The “emerging market” status is expected to further open Kuwait to foreign investment and bring billions of dollars to the oil-rich country as it wants to strengthen its private sector and become a financial hub in the region.
“Winner for the regulator, markets and listed companies”
What worked in favor of entering this category were the significant changes made by the country's Capital Markets Authority such as the adoption of legislation favoring the involvement of foreign investors. The announcement of this new status was well received and last year, the Kuwait Stock Exchange recorded the best performance in the Gulf Cooperation Council markets.
“Investors have already started taking positions in Kuwaiti stocks,” says Junaid Ansari, research director at Kamco Invest. “When the change in category is effective, passive investors – when they realign their portfolio – replace active investors,” he continues. “So this excess liquidity – since we expect the market to fall – will go to the rest of the market, to the rest of the region: so it's a win-win both for the regulator, for the markets and for listed companies in the region and first and foremost, in Kuwait,” he emphasizes.
The advantages of the next new status of the Kuwaiti stock exchange are numerous according to Junaid Ansari.“Kuwait is one of the countries in the region with one of the lowest oil prices, one of the lowest debt-to-GDP ratios and one of the highest credit scores in the region,” he said. “Stocks there are strong and trading well, securities are very liquid and a number of reforms are underway in the country, regulators are providing support... All this constitutes a comprehensive offer to ensure that foreign investors turn to Kuwait and benefit from the growth of its economy,” he believes.
According to this expert, more Kuwaiti state-owned companies are expected to list on the country's stock exchange in the coming years.
However, many parameters remain unresolved as long as the Covid-19 pandemic continues to affect the regional and global economy.
