UAE investor outlook 2016: property, stocks, gold, personal debt, commodities

This year was tough for investors with volatile share prices, property market uncertainty and growing fears over China.

The UAE felt the impact as plunging oil and commodity stocks rattled the Middle East and spooked property investors.

Speculation leading up to the US Federal Reserve decision to finally raise interest rates only added to investor unease.


Analysts disagree on whether recent troubles are a sign of worse to come or a temporary bump on the road towards normalising global markets after the financial crisis. We may find the answer in 2016.

Interest rates

Interest rates have been stuck at near-zero levels for so long that many have scarcely known anything else.

Savers have become accustomed to miserly returns on cash, while house buyers have loaded up on cheap mortgage debt, not always considering how they will repay it when rates do finally rise.

Easy monetary policy may have prevented financial meltdown, but it has also triggered asset bubbles, notably in shares and property, as cheap money flushed through global markets seeking a more rewarding return.

Those days may now be drawing to a close, with the US Federal Reserve increasing its key interest rate for the first time in more than nine years this month.

It lifted rates a mere quarter of a point to 0.50 per cent, but you wouldn’t guess that from all the hype.

The UAE Central Bank duly followed, raising its benchmark interest rate by 25 basis points to 1.25 per cent the next day.

Tom Anderson, an investment adviser at Killik & Co in Dubai, says the initial impact will be minimal. “Savings and mortgage rates may increase slightly but most banks have already priced in this increase.”

Mr Anderson says investors will still have to look beyond cash if they want a decent return for their money.

Patrice Gautry, the chief economist at Union Bancaire Privée in Dubai, says stock markets are well prepared for the rate hike. “In fact, rate rises in the past have had a positive impact on equity markets.”

Higher US interest rates should strengthen the dollar, which will be good news for UAE residents who draw their salary in dirhams, as it may be worth more relative to other currencies.

Neil Blake, the regional head of research at the global advisory firm CBRE, warns that higher borrowing costs will hit emerging markets. “They will now face a triple whammy of falling export prices, a stronger dollar and the prospect of further US rate rises in the longer term.”

It will also threaten indebted households, Mr Blake says, although property prices should hold firm as long as rates rise slowly.

The big question is how fast the Fed raises rates next year. Some analysts have pencilled in four more rate hikes in 2016, others suggest the US economy still isn’t strong enough and believe the recent hike could even be reversed.

Either way, few central bankers in other countries are ready to follow the Fed’s lead right now.

Stock markets

After a promising start, 2015 fell flat for global stock markets, but things could have been much worse.

Shares started the year in a positive mood, lifted by €1 trillion (Dh4tn) of quantitative easing (QE) from the European Central Bank in January, and further monetary stimulus in Japan.

In the UK, the FTSE in April smashed through the 7,000 mark for the first time, finally topping its December 1999 high of 6,930.

However, sentiment was shattered in August, when the Chinese market crashed on Black Monday, wiping billions off global share prices.

Although markets recovered, sentiment remained shaky. Russ Koesterich, BlackRock’s global chief investment strategist, says falling oil and commodity prices remain a concern. “The drop in crude oil has reinforced fears over slow economic growth and deflation.”

It was a bad year for emerging markets, with Brazil and Russia down more than 30 per cent, China ending the year flat, and only India of the much-hyped Brics showing any growth.

George Hoguet, the global investment strategist for SSGA Investment Solutions Group, says: “Investors need to be patient with struggling emerging markets and allow time for growth rates to reach what they were in the past.”

The US posted modest growth of just 4 per cent, but Europe was the star performer, with markets rising more than 7 per cent, although few believe the Eurozone’s problems are solved.

One question now is what impact rising interest rates will have on stock markets, and whether oil will recover.

Cheap oil is turbocharging western consumer nations but at the expense of Middle Eastern producers and emerging market exporters such as Russia, Mexico, Colombia and Venezuela.

Falling oil prices hit Arabian Gulf stock markets. This month, the Dubai and Doha indexes fell to their lowest levels in two years. The uncertain oil price outlook will continue to cast a shadow next year.

A tough year has left analysts wary, concerned about the continuing build up in global debt.

It shouldn’t be forgotten that share prices have been on a bull run since 2009, the third longest on record, and 2015 was the year when it came to an end. 2016 is expected to be bumpy.

Oil and commodities

It was a punishing year for the oil and commodity markets, and the nations that export them.

As the year drew to a close, the price of a barrel of Brent crude plunged to a 11-year low of about US$36.17 on Monday, down from a high of $115 as recently as June 2014.

The major problem is the “unrelenting oversupply in world markets”, according to the International Energy Agency (IEA), with Opec pumping at will since Saudi Arabia convinced fellow members to defend market share against competition from US shale and renewables.

Suggestions that Opec might cut production to prop up the oil price at its December meeting came to nothing.

That is bad news for government revenues in the Middle East, where even Saudi Arabia is feeling the pain, and it is disaster for poorer Opec member such as Venezuela and Nigeria. Consumer nations such as the US, Europe, China and India are the beneficiaries.

Supply is likely to remain high in 2016, especially when sanctions on Iran are lifted and it can begin oil exports, with Russia now preparing for an average price of $35 next year.

Demand growth could shrink to 1.2 million barrels per day in 2016, down from a high of 1.8 million bpd this year, the IEA says.

Nikolas Xenofontos, the risk management specialist at foreign exchange service Easy-forex, predicts another tough year for oil. “Even turbulence in the Middle East and ongoing terrorist events are unlikely to save oil from hitting new lows during 2016.”

Alex Wright, the portfolio manager at the mutual fund manager Fidelity, says falling global prices will eventually cut production and reduce supply. “This means the price has a good chance of recovering.”

The year ahead will determine whether the high-risk Saudi strategy is a success, or self-inflicted disaster.

Commodity prices have crashed to earth in recent years due to slowing demand from China, which consumes 40 per cent of global supply of key metals. Copper and iron ore prices recently hit seven-year lows, forcing mining companies to lay off staff and slash dividends.

Mr Wright says that while oil may recover, commodity prices will continue to fall. “Many mines remain profitable because they need little ongoing investment once they are open. Unlike oil, this means that supply of many industrial metals continues to grow, even as demand falls.”

Property

It was also a tough year for the UAE property market, which suffered sharp falls in sales and transactions.

Apartment prices fell 16 per cent and villa prices dipped 14 cent, according to the latest Dubai Annual Market Update Report by global real estate specialists CBRE.

It warned of price deflation in the coming months, as rising supply hit both rentals and sales values, with another 48,000 units expected between 2016 and 2018.

Matthew Green, the head of research and consultancy at CBRE Middle East, warned that prices could fall 10 per cent next year, but some parts of the market are holding up well, particularly “more affordable locations such as Jumeirah Village Circle, Dubai Sports City and Dubailand Residences, which all achieved rental growth”.

Average rents for Dubai apartments were flat with a 4 per cent dip for villas.

Faisal Durrani, the head of research at property experts Cluttons, says 2015 will go down as a “lacklustre” year.

“In Abu Dhabi, residential rents and capital values all but plateaued, as diminishing hydrocarbon receipts and the subsequent slowing in overall business activity stalled growth.”

Although Dubai has low reliance on oil and gas exports, it has still been hit by the regional slowdown, Mr Durrani says. “Federal mortgage caps and affordability issues have dampening growth significantly and hit prices.”

Dubai’s strong and diverse economy should keep the rental market bubbling along as this should maintain tenant demand, Mr Durrani says.

Globally, the picture was healthier, with house prices rising 2.7 per cent in the year to September 2015, according to the latest Knight Frank Global House Price Index.

Turkey led the way, with prices rising 18.9 per cent, while Hong Kong, Sweden, New Zealand and Luxembourg all recorded double-digit annual price growth. Prices in the US rose 4.9 per cent and the UK posted 3.7 per cent gains.

Kate Everett-Allen, the international residential research specialist at Knight Frank, says the big question is: what impact rising US interest rates will have on property demand?

“This will have repercussions not just for the US housing market, but for those currencies pegged to the US dollar, as well as emerging markets globally,” she says.

Higher interest rates could signal a sticky year for global property in general, and the UAE in particular.

Gold

Gold seems to have spent 2015 searching for a bottom to its four-year-old price correction from the all-time high of $1,923 an ounce in October 2011.

Rock bottom appeared to have been reached in early August around $1,073. But right at the end of November gold prices fell even lower to $1,046 an ounce, 12 per cent down on where they stood on January 1.

But then the European Central Bank resident Mario Draghi spooked the currency markets this month and gold prices rebounded almost $50 in a week. Was that the end of a fourth and final down year for the precious metal?

Technical analysts are pointing to a complete absence of commercial short positions for the first time in 14 years and narrowing Bollinger bands as a reason to be far more optimistic about 2016, and maybe even the last few days of 2015.

In the 1970s when US interest rates soared to an incredible 19 per cent, gold prices rose 25-fold, and the higher the interest rates got the faster gold prices went up.

If Mr Draghi’s comments in early December could rally gold prices strongly, then perhaps the Fed will boost them still higher still, and then we will know that gold prices really did find a bottom in 2015.

* Additional reporting by Peter Cooper and Gillian Duncan

pf@thenational.ae

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