A slow recovery seen for GCC financial markets in 2021

The last year was unlike any other in our living memory with the Covid-19 pandemic having a deep impact on almost all areas of life across almost the entire globe.

And yet, financial markets reached record highs – thanks to abundant liquidity created by easing monetary and fiscal policies. Though optimism is further buoyed by the recent vaccine developments, the logistics of inoculating mass population is complex and possibility of a second wave of infections remains intact. In such a scenario, we look at the main themes threading through the GCC financial markets.

Currencies: With abundant easing of monetary and fiscal policies in the US expected to remain unchanged in the coming year, the USD is set to soften against most major currencies. Consequently, given the pegged status, most GCC currencies will weaken in tandem. EUR, GBP, INR, AUD etc all are expected to strengthen against the Dirham. So any delay in your currency exchange requirements may not be a good bet this year.

Oil: Global economic recovery is expected to boost the demand for oil. On the other hand, supply appears well contained by sincere efforts being taken by Opec+. Most analysts expect oil prices to average around $50 pbl this year, even if new supply from Iran were to come on board after favorable resolution of the issues with the US. Though this is still below the budget breakeven level for GCC sovereigns, it nevertheless is better than last year and likely to remain range-bound.

Bond Market: Though central banks are unlikely to raise interest rates anytime soon, benchmark yields are likely to go higher this year as economies recover from the pandemic driven contraction. Rising yield will hurt bond portfolios, particularly in the high grade segment. High yield bonds are likely to do better in the coming year albeit caution is required to analyse the underlying fundamentals of the issuers. New issuance is likely to slow somewhat in 2021, after a record $126 billion that was raised in 2020 mainly driven by the need to fund high government budget deficits.

Equities: GCC equities underperformed their wider peers last year despite the incremental bid on the back of index inclusion. Although GCC has weathered the corona pandemic better than most of the world, the pace of economic recovery is likely to be slower than other EM markets, owing to the continued pressure on oil prices. While total return on equity investments is predicted to be positive in 2021, volatility is likely to persist and sector differentiation will be high. Tech sector is here to stay, banks and real estate sectors are likely to remain under pressure and consumer and travel will likely improve. Communication and healthcare sector are also expected to outperform others.

Gold: There is abundant uncertainty in the market on the back of a divided political scene in the US and unpredictable course of the vaccine immunization plans. The yield on government bonds is ultra low which makes Gold the obvious choice for safe haven investing. Gold is expected to remain in demand though further gains in prices may be muted.

Real Estate: Real estate in the UAE suffers from over supply. That said, low interest rates, softening currency, improving economic growth and enhanced measures being taken by the governments to contain supply are the pillars that will support better performance in the coming year. In addition incremental demand from overseas investors will probably pick up pace after the EXPO 2021 in Dubai.

Interest Rates: Government rates are unlikely to change this year, however long term yields will likely increase in tandem with the expected increase in US Treasury yields. Hedging your interest rate exposure may be a worthwhile consideration.

Anita Yadav is the CEO of Global Credit Advisory. Views expressed are her own and do not reflect the newspaper’s policy.