x Abu Dhabi, UAEThursday 18 January 2018

Low crude prices spook investors

Collapsing oil prices are scaring away foreign investors who still view the cost of the commodity as a key barometer.

Collapsing oil prices are scaring away foreign investors who still view the cost of the commodity as a key barometer, say industry insiders. A London-based investments manager said there was a strong feeling among western investors that the oil price - which dipped below US$70 a barrel today - was significant. The head of equities investment, whose company manages more than £150 billion (Dh949.29bn) and has GCC investments, said: "There is a psychology among investors that the oil price does matter. This is because the economies are seen as based on the resource, and are viewed as indeed being entirely driven by it."

Global markets continued to slump today because of fears of a recession, in the process wiping out most of the gains made earlier this week. Asian markets continued the decline, with Japan's Nikkei market tumbling a huge 11.41 per cent, Singapore's losing 5.25 per cent of its value and Hong Kong's shedding 4.8 per cent. Europe followed suit soon after, with the London FTSE closing 5.65 per cent down, Frankfurt's DAX down 5.67 per cent and the French CAC-40 shedding 6.68 per cent by closing time.

The GCC was no different, with the Dubai Financial Market down 6.53 per cent, and the Abu Dhabi Securities Market shedding 4.51 per cent. Doha and Muscat lost 3.64 and 6.05 per cent respectively, and Bahrain and Kuwait each shed more than one per cent. The Saudi Tadawul was closed for the weekend. The UAE's two listed oil companies, Taqa and Dana - which are also involved in gas and energy generation - have not been performing well. Since June, around the time oil reached its peak price, Taqa's share price has fallen from Dh4.02 to Dh1.85.

Dana's price fall has been less spectacular - from Dh2.7 in January to today's price of Dh2.03. While western perceptions are important, most GCC-based players believe that unless the price goes back to 1998 levels for the medium term - when it was $10 a barrel - the region will not be impacted. Robert McMillen, the chairman of Mac Capital Partners, based in Dubai, said the foreign attention paid to oil prices was misguided.

"Many of the cash reserves are already in the bank account, so the major infrastructure projects will go ahead," he said. "The Government has the money already so why should they worry if daily revenues fall from, say, Dh1 billion to Dh800 million?" Dr Nasser Saidi, the chief economist at the Dubai International Financial Centre, has said the UAE growth rate would decrease by up to 1.5 percentage points next year because of the international slowdown, but that emerging markets would still outperform developed ones. However, he maintained that the oil price link was weaker than it used to be.

"The link between oil prices and investment is no longer as strong as it was in the 1970s and 1980s, and budget break-even for GCC countries is $35 to $45 a barrel," Dr Saidi told Zawya Dow Jones. Zia Hashmi, the regional general counsel at EFG Hermes in Dubai, said that with GCC growth expected to be slower in the coming years, increased corporate governance may be necessary to attract foreign capital.

He said that while foreign investors were always concerned about corporate governance - such as the detailed and timely issuing of annual reports before they arrived in the country - once they saw the rates of return and growth, most did not press for western standards to be implemented and simply relied on credit ratings agencies. With slower growth now expected, though, Mr Hashmi said that more of a focus on governance, disclosure and transparency would come into play for investors.

He said the Government was showing clear signs of pushing governance, the most obvious target being property practices in Dubai, which had resulted in a number of executives being detained over allegations of corruption. afoxwell@thenational.ae