When the governing Council of the European Central Bank meets on Thursday, it will continue to prepare markets for the start of its long process of normalising its unconventional monetary policy.
But the central bank is unlikely to announce the specific details that markets and others are looking for, and not just because of the complexity of the task at hand. Central bankers will also seek to keep their policy options wide open as they weigh competing and, in some cases, puzzling and uncertain, policy considerations, even as they think about how best to sequence their measures with those of other systemically important central banks, particularly the US Federal Reserve.
As it presents its latest economic assessment and policy findings, the ECB is likely to support the consensus view in the marketplace that, as of January 2018, it will be reducing the pace of monthly asset purchases. This belongs in the context of a gradual phasing out of the programme, combined with rate hikes and, much further down the road, an outright contraction of a balance sheet that has ballooned as a result of the large-scale asset purchase programme. What the central bank is unlikely to do, however, is provide the exact details of this process, including the lower scale of purchases for the first half of 2018, preferring instead to keep that for a governing council meeting later this year.
The complexity of the upcoming taper policy pivot will be one factor behind the likely delay. But it won’t be the only one. Indeed, it may not be the major reason.
Like other central banks, the ECB is seeking to better understand unusual economic dynamics that complicate both policy assessment and policy responses. For example, economic growth has picked up around the euro zone, and forward-looking indicators appear generally encouraging; moreover, perceptions of regional political risks have declined. Yet, inflation remains stubbornly low. Indeed, as much as central bankers will it away, they haven't gotten rid of a lowflation demon that can threaten the region again with growth-destroying deflation.
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That is not the ECB’s only headache. There is also a trade-off between currency and financial stability.
Since the start of the year, and reflecting in part the euro zone’s improved economic performance, the euro’s trade-weighted exchange rate has appreciated significantly. Over time, this is likely to serve as a direct headwind to growth by making exports less competitive and imports cheaper, while also placing downward pressure on an inflation rate that, in the eyes of many central bankers, is already too low. But it also faces a dilemma shared by other central banks: If monetary policy stays loose for longer, the ECB may inadvertently encourage even more of the type of excessive risk-taking, particularly by non-banks, that could culminate in growth-destroying financial instability down the road.
As these issues extend beyond the euro zone, they also entail complicated cross-border interactions and feedback loops, especially when it comes to the sequencing of monetary policy normalisation among systemically important central banks. Moreover, in recent weeks, markets have reduced expectations of the pace of future interest rate hikes in the US. Reinforced by signals from officials there that the terminal rate for the fed funds rate has declined, the result has been even greater pressure for the euro to appreciate.
With all this in play, it is not surprising that the ECB is keen to retain as much policy flexibility as possible. Yet this is not a free good, particularly when it comes to market conditioning and responses.
In the environment of the past few years, markets have become very comfortable in interpreting the lack of official guidance on the policy normalisation as a green light to increase financial bets on the continuation of a low volatility journey, delaying the important consideration of (and positioning for) the destination. This environment also emboldens markets to believe they can lead central banks, rather than be led by them. And there is nothing that short-term-oriented investors and traders like more than what they firmly believe are malleable central banks that remain committed to boosting asset prices and repressing financial volatility.
What is the FNC?
The Federal National Council is one of five federal authorities established by the UAE constitution. It held its first session on December 2, 1972, a year to the day after Federation.
It has 40 members, eight of whom are women. The members represent the UAE population through each of the emirates. Abu Dhabi and Dubai have eight members each, Sharjah and Ras al Khaimah six, and Ajman, Fujairah and Umm Al Quwain have four.
They bring Emirati issues to the council for debate and put those concerns to ministers summoned for questioning.
The FNC’s main functions include passing, amending or rejecting federal draft laws, discussing international treaties and agreements, and offering recommendations on general subjects raised during sessions.
Federal draft laws must first pass through the FNC for recommendations when members can amend the laws to suit the needs of citizens. The draft laws are then forwarded to the Cabinet for consideration and approval.
Since 2006, half of the members have been elected by UAE citizens to serve four-year terms and the other half are appointed by the Ruler’s Courts of the seven emirates.
In the 2015 elections, 78 of the 252 candidates were women. Women also represented 48 per cent of all voters and 67 per cent of the voters were under the age of 40.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
