The global economy is starting to reflate with stronger growth and higher inflation expected in 2017. This coincides with a period in which monetary policy is likely to become less supportive, creating the potential for increased volatility in financial markets. The changing political landscape introduces an additional layer of uncertainty.
We believe four key trends are facing global and Middle East-based institutional investors today: de-globalisation causing volatility; shift towards tax deductions and increased government spending; challenge of capital abundance; and impact of continued structural changes, including demographic, environmental and technological. Organisations will respond in different ways, reflecting their specific beliefs, objectives, governance arrangements and constraints.
Fragmentation
With further political fragmentation and de-globalisation possible, investors should consider stress-testing their portfolios against large equity, bond and currency movements. Reduced levels of liquidity in some markets may exacerbate the magnitude of any sell-offs, providing opportunities for contrarian investors and favouring flexible and dynamic strategies.
Increased protectionism and risk around policy implementation has the potential to create additional volatility in markets. This should provide opportunities for active managers. Political surprises, protectionism and trade tensions also create the potential for substantial currency volatility, so investors should have a clear policy on hedging currency risk.
Shift from monetary to fiscal stimulus
Government policy around the world is shifting towards fiscal stimulus, while policymakers have increasingly recognised the limitations and unintended consequences of further monetary stimulus. The path of inflation over the next few years will be influenced to some extent by the scale and pace of any fiscal stimulus, as well as the actions taken by central banks. Investors with inflation-linked liabilities should consider direct inflation hedges or real assets such as real estate and infrastructure.
Increased uncertainty around monetary policy in an environment of rising inflation is likely to contribute to bond market volatility, creating opportunities for global macro, absolute return bond and unconstrained fixed-income strategies. A more aggressive tightening of monetary policy than is currently priced in may cause some companies to struggle to refinance their debt. This could create opportunities for strategies that are positioned to allocate capital to distressed assets.
Capital abundance
Following eight years of monetary stimulation by central banks, real yields are below zero in much of the developed world, and financial assets have delivered exceptional returns against that background. On a forward-looking basis, we believe that generating annual real returns as high as 3 to 4 per cent will be a challenge over the next three to five years. Portfolios dominated by traditional “beta” (equities, credit and government bonds) now offer a relatively unattractive risk-return trade-off so investors will need to consider less familiar asset classes and more flexible strategies in order to meet return objectives.
Investors should seek returns from a diversified mix of alpha sources and opportunities also remain for high-quality managers specialising in private markets. Less familiar segments of the credit markets (such as asset-backed securities, private lending, trade finance and receivables) also offer opportunities.
In an environment of higher volatility, strategies with the ability to move quickly across markets such as multi-strategy hedge funds or dynamic multi-asset strategies may be helpful in generating returns.
Understanding structural changes
Longer-term structural forces (demographic trends, climate change and technological disruption) will have important implications for investors. In relation to climate change there might be physical risks to real assets or policy risk to any carbon-sensitive assets. Despite uncertainty around US president Donald Trump’s beliefs and US policy trajectory on this issue, climate change remains an issue of global importance and investors should review the extent to which portfolios are exposed to carbon-intensive assets.
The overriding demographic trend is global ageing with the ratio of the dependent population (children and retirees) to the working age population now rising in many countries. This will challenge some countries to a greater extent than others thereby creating economic divergences at a regional level. In the long-term, as developed world baby boomers enter retirement, they will draw down their pools of assets, placing upward pressure on bond yields over time.
Technological disruption will create opportunities, particularly for long/short investors able to identify the winners and losers from technological change. Market cap indexes may be at particular risk from technological disruption given that these hold large weights in the existing incumbents across all sectors.
Many private companies are now choosing to stay private longer than in the past, so investors may need to be willing to allocate to early stage private equity in order to access these sources of future growth.
John Benfield is a partner and regional head of investments at Mercer Wealth
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The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
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A little about CVRL
Founded in 1985 by Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, the Central Veterinary Research Laboratory (CVRL) is a government diagnostic centre that provides testing and research facilities to the UAE and neighbouring countries.
One of its main goals is to provide permanent treatment solutions for veterinary related diseases.
The taxidermy centre was established 12 years ago and is headed by Dr Ulrich Wernery.
Company profile
Company: Eighty6
Date started: October 2021
Founders: Abdul Kader Saadi and Anwar Nusseibeh
Based: Dubai, UAE
Sector: Hospitality
Size: 25 employees
Funding stage: Pre-series A
Investment: $1 million
Investors: Seed funding, angel investors
Fighter profiles
Gabrieli Pessanha (Brazil)
Reigning Abu Dhabi World Pro champion in the 95kg division, virtually unbeatable in her weight class. Known for her pressure game but also dangerous with her back on the mat.
Nathiely de Jesus, 23, (Brazil)
Two-time World Pro champion renowned for her aggressive game. She is tall and most feared by her opponents for both her triangles and arm-bar attacks.
Thamara Ferreira, 24, (Brazil)
Since her brown belt days, Ferreira has been dominating the 70kg, in both the World Pro and the Grand Slams. With a very aggressive game.
Samantha Cook, 32, (Britain)
One of the biggest talents coming out of Europe in recent times. She is known for a highly technical game and bringing her A game to the table as always.
Kendall Reusing, 22, (USA)
Another young gun ready to explode in the big leagues. The Californian resident is a powerhouse in the -95kg division. Her duels with Pessanha have been highlights in the Grand Slams.
Martina Gramenius, 32, (Sweden)
Already a two-time Grand Slam champion in the current season. Gramenius won golds in the 70kg, in both in Moscow and Tokyo, to earn a spot in the inaugural Queen of Mats.
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How to protect yourself when air quality drops
Install an air filter in your home.
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Shower or bath after being outside.
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Stay indoors when conditions are particularly poor.
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Mia Man’s tips for fermentation
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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.”
Real estate tokenisation project
Dubai launched the pilot phase of its real estate tokenisation project last month.
The initiative focuses on converting real estate assets into digital tokens recorded on blockchain technology and helps in streamlining the process of buying, selling and investing, the Dubai Land Department said.
Dubai’s real estate tokenisation market is projected to reach Dh60 billion ($16.33 billion) by 2033, representing 7 per cent of the emirate’s total property transactions, according to the DLD.
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UAE currency: the story behind the money in your pockets
The White Lotus: Season three
Creator: Mike White
Starring: Walton Goggins, Jason Isaacs, Natasha Rothwell
Rating: 4.5/5
