Recent fluctuations in financial and commodity markets due to the coronavirus pandemic have caused some investors to flee, while many experts are struggling to predict their bottoming out, the shape of the recovery, and how long it will take. Economists believe that after the crisis, the trend will be toward reshoring , and companies will be less profitable and more indebted. This comes as the International Monetary Fund has indicated that this year the world is likely to experience its worst recession since the Great Depression, with GDP contracting by 3% .
The Middle East region is particularly vulnerable to fluctuations in oil prices, which recently fell below zero for the first time in 21 years. This, coupled with the coronavirus pandemic, has prompted major Arab economies to commit to stimulus measures worth tens of billions of dollars. But what are the growth prospects? And what might be the collateral damage of the global slowdown for these dollar-pegged regional economies?
“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 market specialist who advises private clients and financial institutions.
Rebecca McLaughlin-Eastham, euronews:
“Can this crisis change investors’ habits? Should we expect a new financial landscape?”
Amro Zakaria Abdu, co-founder of Market Trader Academy:
“Absolutely. I think we're heading towards a widening gap between the world of finance and the economy. They should be linked, but they aren't. There will be more financialization; governments will own a larger share of the economy simply because they're injecting a lot of money into their economies to stimulate them. This will also exacerbate the disparities between rich and poor, unfortunately, because all this stimulus money is going into the capital markets, and not everyone owns stocks or bonds… So when we get through all this, we'll be in a completely different world in terms of the 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 you were to buy, what asset class would you invest your money in? Stocks, bonds, gold?”
Amro Zakaria Abdu:
“There’s a new category called ‘stay-at-home stocks’ : these are essentially stocks of companies whose technologies primarily allow us to improve our daily lives in lockdown or to work as usual from home . These are tools like Zoom, for example, which has seen 106% growth since the beginning of the year. There’s also Microsoft and Amazon, which just reached a record high. The same goes for Alibaba. So all these companies will have very good results. Regarding gold, right now—excuse the pun—it’s a Goldilocks-style fairy tale: all the indicators point to a typical upward trend in the price of gold . Gold usually appreciates during periods of uncertainty. I think the ounce will reach $1,800 this year and probably, over the next twelve months, its price will reach a new record.”
“The United Arab Emirates is in a better position compared to others in the region”
Rebecca McLaughlin-Eastham:
“What is your forecast for the average price of oil? And what will it mean for economies, particularly in this region, that are trying to balance their budgets?”
Amro Zakaria Abdu:
“I don’t expect an oil recovery anytime soon, at least not in terms of price, for two reasons. The first is 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 pandemic. The second reason is – I believe – that after this pandemic, the economy will not be the same. So I don’t think demand can quickly return to its previous level.”
Rebecca McLaughlin-Eastham:
“The International Monetary Fund has predicted a 3.5% contraction 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 believe this is the most optimistic scenario, I would say. Overall, the indicators will be much worse, at least for the remainder of this year. For the economies of the Gulf Cooperation Council countries, which are generally dependent on oil with a trickle-down effect , I think it will take them longer than others to recover. As for the United Arab Emirates, it is probably the country in the best position compared to the others because its economy is much more complex. Every stimulus measure generates a broader ripple effect.”
There will need to be some form of joint borrowing within the EU”
Rebecca McLaughlin-Eastham:
“Countries like Germany and the Netherlands are clearly opposed to what are called “coronabonds”. Are they right to oppose this idea of mutualizing national debts ? Or do you think it’s a good idea for the European Union?”
Amro Zakaria Abdu:
“I believe that sooner or later, they will have to resort to some 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 currently access the markets at a negative interest rate or with a negative yield. By comparison, Italy is at nearly 2%, which is 200 basis points higher than Germany. So the danger is that we will find ourselves in a situation like Greece, but this time with Italy, whose economy and debt are much, much larger . And the problem that will then arise, I fear, is that nationalist movements in Italy will gain momentum, and we saw what happened with Brexit. So Europeans will have to resign themselves to adopting a plan with shared responsibility, like these bonds. Whether they are called “coronabonds” or not, I believe it is a good opportunity to to equip themselves with this tool.”
Rebecca McLaughlin-Eastham:
“Restarting European economies is obviously a considerable task. Governments are facing stimulus measures that are costing them more and more, unemployment is rising, and businesses are going bankrupt. It's a delicate issue, but in your opinion, when can things return to normal economically?”
Amro Zakaria Abdu:
“The fourth quarter of this year is probably the most realistic timeframe because, again, we don't know when all this will be over. The fourth quarter or the first quarter of 2021 will probably be the point at which all the engines of the economy will have started running again in some way. I doubt there will be any real economic growth in Europe before then because, you know, we have so many things to sort out.”
The (future) bright days of the Kuwait Stock Exchange
When a “frontier market” in the region rises to the category of “emerging market,” it is an event. And the Kuwait Stock Exchange, one of the oldest in the Middle East, was on its way there before the Covid-19 pandemic broke out.
Since then, the value of its index has been impacted, and it also had to absorb Morgan Stanley Capital International's (MSCI) announcement in April that it was postponing its reclassification from "frontier market" to "emerging market" due to operational issues related to the pandemic. The date of this change in status is currently unknown; it could occur around November, according to the American firm.
A “frontier market” is considered relatively small and illiquid. These factors often make it less accessible to investors. The status of “emerging market,” on the other hand, implies that it is transitioning from a closed market system to a more open one, driven by economic reforms, according to Investopedia. Countries such as Egypt, the United Arab Emirates, and Saudi Arabia belong to this category. It sits just below the highest level: that of “developed market,” which is associated with higher levels of financial transparency and efficiency, and greater openness to foreign investors.
The “emerging market” status should further open Kuwait to foreign investment and bring billions of dollars into the oil-rich country as it seeks to strengthen its private sector and become a financial hub in the region.
“A win-win situation for the regulator, the markets, and listed companies”
What contributed to Kuwait's entry into this category were the significant changes implemented by the country's Capital Market Authority, such as the adoption of legislation encouraging foreign investment. The announcement of this new status was well received, and last year the Kuwait Stock Exchange recorded the best performance among the Gulf Cooperation Council markets .
“Investors have already started taking positions in Kuwaiti stocks,” says Junaid Ansari, research director at Kamco Invest . “When the reclassification takes effect, passive investors—when they realign their portfolios—will replace active investors,” he continues. “So this excess liquidity—since we expect the market to fall—will flow to the rest of the market, to the rest of the region: so it’s a win-win for the regulator, for the markets, and for the listed companies in the region, and first and foremost, in Kuwait,” he emphasizes.
According to Junaid Ansari, the advantages of the Kuwait Stock Exchange's upcoming new status are numerous. “Kuwait has one of the lowest oil prices, one of the lowest debt-to-GDP ratios, and one of the highest credit ratings in the region,” he says. “Stocks are strong and trade well, securities are highly liquid, and a number of reforms are underway in the country, with regulators providing support… All of this makes for a comprehensive package to attract foreign investors to Kuwait and allow them to benefit from its growing economy,” he believes.
According to this expert, more Kuwaiti state-owned enterprises are expected to be listed 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.
