By Ali Janoudi and Simon Smiles
In 2017, Middle Eastern investors will confront a world marked by policy shifts and a rising likelihood of reflation. In certain respects, the Middle East itself has also contributed to this trend. Coupled with potential fiscal stimulus in the U.S., OPEC’s decision to cut oil output for the first time in eight years is a major policy change that supports inflation.
But in other respects, policy dynamics globally are pointing in a more volatile direction. While key Middle Eastern and emerging market countries such as Saudi Arabia are gradually opening up their economies, some developed markets are growing more inward-looking in areas like trade, following the U.S. presidential election and the U.K.’s Brexit vote, respectively. To best navigate these developments, Middle Eastern investors will have to take advantage of a more active portfolio toolkit.
According to a recent global poll of UBS’s Industry Leader Network of entrepreneur, clients underlined how politics is already affecting planning for next year. A quarter named the political landscape as the largest potential game-changer for their business in 2017, more than any other variable. Market volatility around China’s currency depreciation in January, the Brexit vote in June and the U.S. election in November have shown the importance of diversifying portfolios across regions and asset classes and sticking to a long-term strategic asset allocation.
To broaden this allocation further, wealthy individuals should increasingly consider alternative investment approaches. Those who can lock up capital for long periods might try to enhance their risk-adjusted returns via a strategy with greater allocations to private markets, hedge funds and impact investing, which aims to generate a defined social benefit as well as a competitive financial return. For instance, over the next 10 years, UBS expects annualized returns of 12 percent from private equity, compared with 7.4 percent for listed equivalents in the U.S., 9.6 percent in the Eurozone, and 9 percent in emerging markets. Those who are interested in more active management can try to generate extra returns via short-term investment opportunities, even when markets are trending sideways or downwards. All of these ideas can help diversify portfolios, enhance returns and cushion them against shocks.
But despite the risks, the political landscape arguably offers even more by way of opportunity. The most important example is the potential for rising growth and inflation globally. This is likely to be driven by U.S. stimulus and the recovery in emerging markets, among other areas. In the U.S. alone, UBS anticipates GDP growth will accelerate in 2017, from 1.5 percent to 2.4 percent, which helps drive our positive view on the U.S. stock market despite it reaching new heights recently. Until the end of the first half of 2017, UBS expects that U.S. and emerging market equities will likely perform better than other stock markets globally. The UBS House View is also positive on the prospects for a basket of emerging market currencies – the rand, real, ruble and rupee – compared with growth-sensitive developed market equivalents – the Australian and Canadian dollars and Swedish krone. In the U.S., Treasury Inflation-Protected Securities are also likely to benefit from any increase in stimulus and inflation, as well as any accompanying wage growth and stabilization in oil prices.
In 2017, Middle Eastern investors would be well advised to maintain internationally diversified portfolios across asset classes. Although economies like Saudi Arabia are shifting away from a reliance on oil and gas, Middle Eastern markets still depend heavily on hydrocarbon production and related industries. A more international range of exposures is readily available, to high net worth and affluent investors as well as their ultra-high net worth peers. As Middle Eastern investors enter 2017, ‘diversify’ should be their New Year’s resolution.
Ali Janoudi is the Group Head Middle East and North Africa at UBS, and Simon Smiles is the Chief Investment Officer for Ultra High Net Worth at UBS Wealth Management