Asia offers an attractive cocktail of cyclical and longer-term structural characteristics, making it an ideal place to invest.-
By Xian Chan, Arabian Bussiness.
During recent conversations with Middle Eastern clients, I’ve been struck by how sharply financial market fortunes have improved since last year.
Middle Eastern equities have rallied more than 70 percent since the worst of the pandemic. The oil price is up almost four times from its lows of $20 last year. And domestic real estate has recovered slightly, with Dubai residential prices increasing modestly in the first quarter.
Are these developments a ray of light pointing to a sparking oasis, or are they an illusionary mirage?
There are definitely reasons to be hopeful about the region’s prospects. For example, over 70 percent of the UAE’s adult population have been vaccinated. Travel should open up over the coming months, allowing business and tourism to operate more freely. And last but not least, the 2020 Dubai Expo is finally expected to land at year-end. These factors should be positive for earnings and UAE equities, in particular.
But should the Middle East be a lone oasis for investors? We prefer to seek out diverse opportunities that could include Middle Eastern investments but also other opportunities.
Firstly, even if we are positive on the UAE stock market, there remain challenges around real estate. Dubai residential prices still lag peers around the world in the current property boom. To put it in perspective, residential prices in the US and UK have risen over 10 percent during the past year, while Dubai’s prices are still lower during this period. Significant stocks of existing apartments and higher demand for more spacious villas (a trend seen elsewhere) may put pressure on the real estate market as a whole.
Second, we think oil demand could face hurdles if consumer and travel behaviours don’t return to pre-pandemic habits. Anecdotally, there are reports of companies seeking to reduce business travel and offer flexible working arrangements to employees – people travelling less may put pressure on the oil price over the long term.
Gold, a traditional store of value in the Middle East, has also struggled to reach the lofty heights of $2,000 back in 2019. Gold has traditionally struggled when bond yields are higher, and vice versa. With bond yields now elevated, and likely to remain so in light of the global recovery, we don’t see much upside on the gold price from current levels.
In particular, investors could focus their attention on the China and Singapore stock markets. China has committed to structural reforms to create a more open global innovation powerhouse and has demonstrated its ability to manage further waves of the pandemic relatively well. China equities have also been weaker recently, offering an attractive entry point for a market we think is ripe to rally again.
For its part, Singapore is structurally exposed to the global recovery thanks to its position as an advanced manufacturer. It is another market that has proven its ability to weather new waves of the pandemic and is a good proxy to overall global growth.
Cyclically, we expect the greatest rebound of household consumption in countries where vaccination rates are higher. China, with almost half its population vaccinated, and Singapore, with about 60 percent vaccinated, are good examples of these, and should benefit.
Both China and Singapore’s stock markets are also exposed to sectors related to digital development, such as digital services, e-commerce and semi-conductors. These areas are interesting from a demand perspective, thanks to China’s determination to further boost innovation.
So, rather than focusing one’s bets on a single oasis in the Middle East, why not cast the net wide and seek out additional opportunities? Asia could be that alternative oasis, offering an attractive cocktail of cyclical and longer-term structural characteristics, making it an ideal place to invest.
Xian Chan is chief investment officer of HSBC’s retail wealth business and global head of Research and Insights of the private banking and retail wealth segments
