Key Investment Trends for Middle Eastern Investors

Middle Eastern investors are attuned to a diversified global portfolio and are very interested in the performance of markets in the United States, Asia and China. Apart from a slight bias towards the domestic market, a portfolio of Middle Eastern clients is not that different from a European or Asian portfolio.

Zawya spoke with Tuan Huynh, Global Head of Discretionary Portfolio Management (DPM) in Deutsche Bank’s International Private Banking division, for his perspective on the trends holding back regional equity and income markets fixed, commodities and real estate.

How should MENA regional equities fare this year? What are the growth drivers?

Equities from all regions, including the Middle East and North Africa (MENA), performed very well in the first quarter. As we look at our outlook for 2021, due to growth prospects based on continued accommodative monetary support and adequate fiscal support, particularly in the US and Europe, and due to relatively low interest rates on yields , stocks should perform very well.

Growth in the Middle East depends on two factors: The first is the price of oil, which is trading around $60/barrel. OPEC’s announcement that it will not alter production cuts will be very supportive for oil prices and the region.

The second is rising yields in the US, which is also impacting bank earnings in other regions. For example, the Saudi stock market is dominated by banks; this is still more than a third of voters in the financial/banking sector.

The steeper the yield curve, the better it is for bank earnings, and so we’ve also seen the outperformance of not just the banking index but the broader market, because the sector is so dominant. We believe that banks will continue to perform better, and our outlook for the next six months is therefore positive.

How do rising yields affect bond markets?

The upward trend in yields is definitely negative for the fixed income market.

For example, if you’ve invested in Treasury bonds this year, it’s one of the worst asset classes so far, with higher yields driving down bond prices, driving yields negatives.

If yields were to move towards the 2% range, which the market is currently pricing in, this would lead to further losses on the fixed income side, which is why we have also offered and suggested to our clients not to just look sovereigns, but it is better to look at credit spreads such as investment grade spreads in emerging markets (EM).

Emerging equities and bonds are therefore the asset classes that we recommend to our clients.

Do you see investment potential for gold going forward this year. What are your recommendations?

In commodities, we recommended gold. He performed very well last year. Gold tends to perform well in a rising negative yield environment. But now it’s the other way around; due to rising nominal yields, gold fell slightly.

We see some potential for gold, particularly as a hedge in the portfolio, but we also tell our clients to look to cyclical commodities such as base and industrial metals, which will benefit from a rally trade through increased demand when the economy picks up. to open and retrieve. Base metals will do very well as the recovery in economic activity takes hold.

Depending again on the individual risk profile, investors are recommended to hold 2-5% gold, which we believe is a reasonable amount to have as a hedge in a portfolio against any type of unknown risk that might appear.

Why is rising yields not a good environment for precious metals?

Typically, when you hoard gold, it earns you no dividends or interest, so you incur an opportunity cost for hoarding gold, and you also pay a price for hoarding or storing gold. gold. But when the interest rate or yields are in negative territory, the opportunity cost becomes positive. So instead of investing in negative yielding fixed income paper, it is better to hold gold. This is why gold performed extremely well last year.

Now yields are rising, so it may be more attractive to hold a US Treasury, as it currently pays 1.7% instead of perhaps 0.7% a year ago.

So opportunity cost becomes more relevant for gold, so gold has lost some of its appeal here, but we would still recommend it in a diversified portfolio.

Real estate investments continue to grow in popularity. What are the factors to be aware of when evaluating an investment?

Rising yields threaten real estate markets. Economies will recover quite well.

The Fed has signaled it won’t raise interest rates until 2024. That’s at least some assurance from the world’s largest central bank and most important central banks to keep interest rates on hold. low interest, and this will provide additional support to the real estate market.

With interest rates and yields at a relatively low level, investors are definitely looking for alternatives such as real estate, and we are seeing such demand from our high net worth clients.

If you can borrow money relatively cheaply, it makes perfect sense to look at the real estate market.

Monetary policies around the world can support real estate investments, but different areas of the real estate market should be considered. For example, the demand for office buildings could be less in the future, and the demand for residential real estate could increase.

(Reporting by Seban Scaria; editing by Daniel Luiz)

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Disclaimer: This article is provided for informational purposes only. The Content does not provide tax, legal or investment advice or an opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer here.

© ZAWYA 2021