Middle East markets expected to ride out global uncertainty

Large investment flows, thawing of relations between regional nations key to growth


Somshankar Bandyopadhyay

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The Dubai Financial Market. - KT file
The Dubai Financial Market. - KT file

Published: Thu 20 Apr 2023, 2:57 PM

Observers are optimistic that the Middle Eastern markets, which had a stellar year in 2022, will yield equally promising results in 2023, based on the larger inflow of investments and companies moving into the region.

In 2022, GCC markets had a 21 per cent share of the global IPO volume, as compared to only 2 per cent in 2021, with expectations that big names will be going public this year, following in the footsteps of Emirati companies ADNOC Gas and Al Ansari Exchange, which were repeatedly over-subscribed, reflecting high demand on investments in the region.

Since the beginning of 2023, the investment world has witnessed multiple shocks, leading to markets in an almost constant state of turbulence.

Market stakeholders, including brokers, traders and companies, have centered their primary focus on central banks, especially the Federal Bank, awaiting to see if interest rates are going to rise, and if so, if they will keep increasing. The banking crisis caught everyone by surprise, and the focus of observers shifted from expecting the rise of interest rates to anticipating rate cuts since the crisis started showing ripple effects in Europe with the collapse of Credit Suisse.

However, with global players successfully interfering to contain the banking crisis, eyes once again turned to central banks and interest rates. This, nevertheless, did not appease traders’ concerns regarding the volatility of the markets, especially in GCC countries which heavily rely on oil as a main source of income.

In the oil market, despite the Russian-Ukrainian conflict and fears of oil and gas shortages, which had previously led oil and gas prices to skyrocket, demand is not outstripping the current supply. Oil prices have been on a multi-month downtrend — and may continue to drop — as much of the recent move upwards was a result of short sellers closing short positions. If oil prices continue to drop and interest rates rise, this might start to have a negative effect on markets.

Given the recent warming of relations between key players in the Middle East, which minimizes the possibility of unforeseen geopolitical turmoil in the region, analysts believe that Middle Eastern markets might continue to perform well in 2023, especially if interest rates stagnate or start dropping and oil prices don’t go below the $60 per barrel mark.

Ritu Singh, Regional Director of Stone X Group. - KT file
Ritu Singh, Regional Director of Stone X Group. - KT file

Ritu Singh, Regional Director of Stone X Group, said: “The key to helping traders trust markets again is two-fold: helping them have a better understanding of the concept of volatility and how it works, and helping them navigate their portfolio through volatility. We always encourage our traders to diversify their investment portfolio, and not be overly reliant on a single market type because we believe that trading while markets are volatile starts with mitigating risks, and this may happen when a trader invests in different market types to avoid placing all their eggs in one basket, which could lead to great losses in case of market crash. To encourage better risk management, we aim to constantly provide trading tools and programs that encourage serious traders to diversify their investments”.

In a trader’s mind, volatility means losses. For example, volatility in currencies can negatively affect importers and exporters in the region as a strong dollar might make them less competitive since the currencies are pegged to the dollar and the rapid price movement means exporters do not get the opportunity to factor this in. On the other hand, “a strong euro or yen might reduce the profits of Middle Eastern importers, such as importers of Japanese cars or European raw material”, Singh noted.

However, there are multiple ways to hedge that exposure, and that hedging applies to many other sectors beside currencies. Energy hedging, for instance, is important for airlines and factories, while interest rate hedging is important for banks and those with fixed income instruments on their balance sheets.

Accordingly, understanding how volatility affects the profitability and solvency of an institution, and being able to properly managingthe risk are two essential factors in current market conditions.

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