Low volatility and complacent markets are often a precursor of more bumpy times ahead. While measures of financial market price moves were hitting rock bottom levels a few weeks ago, some were bemoaning how quiet markets were. Meanwhile, the best traders were scouring the calendar for risk events that could herald the end of the calm before the storm hit.
Within the past week, markets have been forced to address a much more hawkish US Federal Reserve meeting. Although their statement was little changed, optimism on President Joe Biden’s spending plans and the reopening economy saw positive revisions to growth forecasts and even more substantial inflation changes, with the Fed’s main measure, the core personal consumption expenditure index, now set to end this year at 3 per cent versus the 2.2 per cent that was previously forecast.
This, in turn, has crucially moved the dial forward on future interest rate hikes to 2023, with seven out of 18 Fed officials now going for a rate move next year.
The consequences of this surprising volte-face are now affecting investors in many ways, as it was presumed by a consensus that the “patient” Fed would continue to look through rising price pressures and not raise rates until 2024.
The previous central bank meeting had also seen chair Jerome Powell utter the infamous phrase that “it is not the time to start talking about tapering”, in reference to the first part of the process of normalising monetary policy and cutting back on the bond-buying programme. It would appear the Fed is now well advanced with this discussion.
There is a saying that you should not fight the Fed. This makes total sense when you think about it as the US government and central bank have pretty much unlimited resources. So, investors are always well-advised not to bet against its policies.
If the Fed wants inflation, for instance, possibly because they believe it is a way out of the massive debt they have run up both after the financial crisis and the Covid-19 pandemic, then investors shouldn’t stand in their way.
Certainly, the market moves since the meeting show that traders are now scrambling to adjust their long-held positions. We have seen major rotations in markets as investors back out of the so-called crowded and expensive “reflation trade”.
The market moves since the [Fed] meeting show that traders are now scrambling to adjust their long-held positions
Commodity prices have tumbled, long-dated US government bond prices have raced higher, forcing down yields, and the US dollar enjoyed its best five-day streak since last September by the end of the week of the shock Fed meeting.
The switch out of value stocks into growth companies was highlighted by the outperformance of the tech-heavy Nasdaq over the Dow and broader S&P 500 indices.
Gold especially felt the full force of the volatile market and plunged 6 per cent lower over the week – its biggest weekly loss in 15 months. The precious metal is a store of value but it has no opportunity cost as there is no yield. This is why it tends to correlate negatively with real interest rates, which gapped sharply higher after the Fed rendezvous.
While they promised to hold interest rates at zero and let inflation expectations grow, gold was a desirable asset for investors to include in their portfolios. Now, with interest rates starting to move higher and above the rate of inflation, other safe assets have become relatively more appealing, dulling the attractiveness of bullion.
The pressing concern for gold prices may lie with inflation and whether or not the forecasted lift – which is already being seen throughout the economy – will be transitory or more lasting.
A transitory trend in inflation may still be in line with current Fed thinking and would see rates potentially rise but not too much, which bodes well for gold. Alternatively, more lasting inflation could cause rates to rise higher than expected and while the Fed would try to contain upside price pressure, the implication would likely drag on gold.
Much depends on policymakers’ views, even as some on Wall Street believe their meeting is simply a transient tailwind for dollar strength and the related shifts in markets.
Many economists still predict broad weakness in the greenback, driven by the currency’s high valuation and widening global economic recovery. All this bodes well for increased volatility, in contrast to those quieter weeks some were condemning a few weeks ago.
Hussein Sayed is the chief market strategist at Exinity
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.
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.”
Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
