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Abu Dhabi, UAETuesday 16 October 2018

Investment trends that will affect the Middle East in 2018

The writer identifies four global trends and outlines some tips for investors 

As 2018 starts, investors are preparing for an uncertain year. While the global economy is growing at its fastest pace since 2008, new risks have come to the forefront of investors’ minds, such as growing political and economic challenges, and an increasingly complex global business climate.

The Middle East is no exception, as longstanding regional conflicts, diplomatic crises and an ongoing economic slowdown are creating additional challenges for the region’s institutional investors.

To help investors navigate this business environment during this year, we identify four global trends that will impact the region, and outline some tips for investors looking to stay ahead in uncertain times.

In response to strong global growth, many of the world’s major banks are starting to pull back on expansionary monetary policies. The US Federal Reserve recently announced a plan to gradually normalise its balance sheet over the coming years (referred to as quantitative tightening or “QT”).

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The Bank of England implemented its first rate hike since 2007 in November last year. The European Central Bank has announced a reduction in the rate of asset purchases from this January. The pace and scale of the shift from monetary easing to tightening will be a major influence over economies and markets – both in the region and globally – through 2018 and beyond.

This is likely to have a direct impact on the Middle East, as the region’s central banks have historically followed the actions of the US Federal Reserve, making future interest rate increases a possibility for the region.

The later stages of a credit cycle typically present a challenging environment for investors, offering lower returns and greater risks than the early or mid-cycle periods.

While we anticipate the current economic strength will continue into 2018, investors should start considering the ways in which they might prepare portfolios for the risks and opportunities that the late stage of this credit cycle could present.

As many GCC nations’ currencies are pegged to the US dollar, and many of the regions’ governments and financial institutions mirror the credit policies set by the US, an increase in the cost in borrowing in the region is likely.

Since the financial crisis of 2008, politics has become increasingly polarised, manifesting in the Brexit vote, elections across Europe, the election of Donald Trump and more recently in the Catalan bid for independence. In the region, this political fragmentation has been seen with the GCC-Qatar diplomatic standoff, an increasingly assertive Saudi Arabia, and growing tensions between the GCC and Iran. Investors are likely to face an environment of heightened political uncertainty for some time and should consider stress testing portfolios when reviewing their strategy in 2018.

The financial crisis of 2008 chipped away at trust levels and as such, institutional investors increasingly need to recognize the importance of their role in acting as good stewards of the capital entrusted to them. Investors need to have a transparent set of beliefs in relation to environmental, social and corporate governance (ESG) issues as well as recognising and managing systemic risks such as climate change. It is anticipated that a growing percentage of investors will seek to reflect their values and to promote social good when investing their assets.

This global ESG trend aligns with many government initiatives in the region to promote sustainability, such as the UAE Sustainable Development Goals, Dubai Smart City Initiative, ECO Mena Initiative and many others, which place sustainability at the heart of the region’s modernisation and diversification efforts.

Navigating these four trends will be essential for investors to capture returns in 2018, as an increasingly complex investment climate requires increasingly sophisticated investment solutions.

John Benfield is a partner and the regional head of investments for Mercer Wealth, the world’s largest investment consultancy, with regional offices in Dubai and Riyadh