- Dramatic drop in oil prices is a game changer for the macro outlook for 2015
- ‘Too low’ oil prices adds to the picture of rising global instability
- Deep structural reforms will make GCC less reliant on oil revenues
- UAE’s diversified economy is better positioned to withstand market volatility
Experts from Crédit Agricole Private Banking commented at a media roundtable today that whilst low oil prices are a challenge for oil exporting countries, it is also an opportunity for stable GCC countries to implement deep structural reforms and move towards becoming more mature and diversified economies.
“The dramatic drop in oil prices is a game changer, with respect to the macro-economic and market scenarios in 2015 and the medium term. As a result of this low price scenario, it is crucial to note that mature countries (as a group) are no longer in recession and demand could undoubtedly be stronger, but risks to the downside are still manifold. However, the supply side emerges as the main cause for the oil prices drop, rather than weak demand. However, a ‘too low’ oil price adds to the macro picture of rising global instability”, said Dr. Marie Owens Thomsen, Chief Economist, Crédit Agricole Private Banking.
Oil prices are likely to stay relatively low in 2015, and/or until demand picks up strongly. But demand could evolve rapidly as GDP growth is likely to accelerate in context of geopolitical and climatic developments. With such low price levels, oil demand is also likely to rise as alternative sources get priced out of the market.
Dr. Marie Owens Thomsen continued, “In this context, 2015 will witness a new and rare phenomenon in the global economy – ‘transflation’. In other words, it is a situation of deflationary expansion where inflation/prices fall and GDP expands simultaneously. This will entail higher growth and lower inflation/prices in oil importing countries but pose unique challenges to oil exporting regions. On the other hand, low oil prices represent a great opportunity for the GCC to implement deep structural reforms to decrease reliance on hydrocarbon revenues, and take their economies to the next level of their growth trajectory.”
This ‘transflation’ scenario is expected to be rather short lived, but 2015 will be the one year during which to take advantage of the unique constellation of stronger growth, lower inflation, and low interest rates – a favourable environment for all risk-asset classes.
“Volatility is likely to be greater in 2015 as markets struggle to come to terms with this new environment. Investors who dislike marked-to-market fluctuations would need to adjust their allocations to the new environment. In this context, we favour core holdings of quality assets, possibly combined with a few opportunistic allocations for those with less risk aversion. We close our outlook on a positive note for investors who should be able to look forward to high single-digit returns in line with companies’ earnings growth over the year to come”, added Dr. Marie Owens Thomsen.
In regards to global bond markets, there will be pockets of opportunities but they will be less and less obvious to the non-professional investor. The next big move in market interest rates is likely to be up, although lower inflation should mitigate this trend.
The MENA bond market was the best outperformer among Emerging Markets peers with a total return of nearly 10% for high yield issuers until mid-September 2014 when oil declined below the psychological threshold of USD 100.
“This drastic fall in oil prices has affected the MENA bond market in the fourth quarter of 2014, but in a limited way compared to global peers. From mid-September and for a couple of months, most names remained resilient with some general weaknesses witnessed across the board. The sell-off in MENA bonds accelerated towards end of November through year-end 2014 and took down the total return of regional bonds to c.7.20%. This performance can be considered excellent given that it is twice as much as the performance achieved by global Emerging Markets Corporate Bonds in 2014. The performance of MENA bonds in 2015 is expected to be lower than last year, because of the expected rise in US Treasuries rates and also because of the lack of sufficient triggers for a significant spread compression”, commented Ms. Christiane Nasr, Head of MENA Fixed Income & Director at the Dubai office, Crédit Agricole Private Banking.
Christiane Nasr concluded, “In case of a scenario of prolonged decline in oil prices, the GCC region has less to worry as it has solid buffers in terms of foreign exchange reserves and the huge assets of its sovereign wealth funds. The UAE in particular is better positioned to withstand this volatility, due to its diversified economy and the supportive macroeconomic context, robust bond market and ample liquidity. Within the current market scenario, we continue to have a bullish stance on Dubai corporates, but Abu Dhabi government related entities have less room for further spread compression from current levels.
On the other hand, whilst Saudi Arabia is sitting on vast buffers, there could be a cut in government spending to face the decline in oil prices. In such a situation, public and private companies could rely on other refinancing channels such as the global bond market. This is especially true in the context of Saudi Arabia opening its USD 509 billion stock market to foreigners this year. This will add more transparency, visibility, liquidity and thus trigger more capital flows to the kingdom’s financial market. The scarcity of Sukuk in Saudi Arabia is helping them to remain resilient, albeit some weakness was observed in the past few months.”