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‘Fed Rate Hike Won’t Impact Investment Inflows Much’

April 2015

Fathi Ben Grira, CEO, MENACORP, Dubai, tells Wealth Monitor that even if the US Federal Reserve decides to go for a rate hike, it won’t have a big impact on regional investments

How would you describe the journey so far of MENACORP as one of the largest financial services companies in the region?

MENACORP’s performance so far has been excellent. We’ve made our shareholders and more of our clients happier. We were ranked the best brokerage firm for the last two consecutive years. This shows that we’re a consistent performer and we feel privileged that we’ve managed to deliver the same quality of service all the time. I believe this is the best way to remain at the top.

MENACORP has been in multiple business verticals ranging from investment banking, asset management, and brokerage. What are the other business areas of growth you are seeing going forward? What are your plans?

For us the number one priority is to add new markets to our brokerage business. Our clients have increasingly reposed trust and confidence and we’ve been successful in executing trades in the best interest of our clients. At the same time, our clients are keen to explore profitable target markets in the region or beyond for investment opportunities. And this is what our strategy is focusing on. More specifically, we’re going to focus closely during 2015-16 on the Dubai Gold and Commodities Exchange. This is the market in which we believe strongly, as it is extremely popular with investors from the sub-continent and we want to be able to serve our clients better in this market.

Talking about the global market conditions, the historically low interest rates in the US have been driving global investors in recent years to search for yield in fast growing frontier/EMs, including the UAE. The US Fed however is expected to raise rates soon. Do you believe the timing of a Fed rate hike is good for the region when oil prices are low?

We have to see if the Fed really goes for a rate hike so soon. We’ve been expecting it for quite some time, but the Fed has maintained the status quo. The US economy still needs a low interest rate regime because it is fuelling their economy. I don’t really expect a major change in the whole Fed policy so soon.
However, even if the Fed decides to go for a rate hike, I don’t think it would impact much the investment flow in the GCC region, as the investment inflow in this region is more connected to the local considerations than global. Nonetheless, the impact of global factors are being felt a little bit, especially in the case of Dubai which is a tourist hub. For instance, the Russian rouble slump against the dollar has negatively impacted Russian tourist inflow and Russian investment in Dubai real estate since they now have to shell out more roubles for the same amount of dirham.

So is a stronger dollar not always good for the UAE economy?

Aside from oil, the UAE and the region is largely an import-based economy. So a strengthening dollar has a positive impact in terms of lower cost of living because anything you buy in supermarkets that’s coming from non-dollar denominated countries costs less. At the same time, a strong dollar makes this country more expensive for overseas investors, as it makes holidays in Dubai or hotel room rates and realty investments in the region more expensive for a German, Swiss or French traveler or investor.

The outlook of crude oil looks bearish, at least in the short term. How do you assess the impact of weaker oil price playing out in the UAE and the wider region?

Initially, the impact was quite severe on the regional financial markets, and worried investors rushed to take their money off the table.
But now after this knee-jerk reaction, the dust is settling down and investors have now become used to the conditions. The great thing is that local governments like the UAE have reiterated their commitments to not curtail their infrastructure spending. More importantly, the low oil price poses an opportunity for the region’s governments with huge fiscal reserves to be more efficient.

The rise of the dollar against major currencies has also brought down the valuations of European equities, because of the weaker Euro. Do you believe many regional investors are now finding European stocks more attractive and are putting their money there than keeping it in the region?

We recommend our clients to invest in European markets especially in stocks of companies that are more export-oriented and which sell their products worldwide. This is largely because a weaker euro benefits Europe’s export-oriented companies, as it boosts their sales earnings and makes them more competitive. We therefore believe these companies are good picks.

On the opposite side, in the US markets we believe focusing on blue chips which are leaders in the home market, as the local US economy is gathering pace. Nevertheless, despite European stocks looking cheaper, we can’t say the money will shift from here to Europe because regional investors still like to invest in their backyard, though it might be tempting for sophisticated investors such as Sovereign Funds to look at Europe.

The Q4 corporate earnings in the UAE are a bit down from Q3. What according to you explains this and what’s the outlook for the rest of the year?

I don’t believe it’s something dramatic. Now we’ve new catalysts coming for the economy with the Expo 2020 in Dubai and the 2022 FIFA World Cup in Qatar. I’m sure after the Ramadan, you’ll see all the first tenders issued for big projects, which will need performance bonds and guarantees from banks. This is going to have a multiplier effect as it will benefit not only the banks, but contracting companies, fit-out companies and everyone else.

Saudi Arabia is about to open its equity markets, the largest in the Middle East, to foreign investors. What impact do you believe it could have on other markets in the region? Will we see a flight of capital from UAE to Saudi markets?

The positive impact of it would be felt across the region, since at the end of the day all GCC stock markets are one big market. Some fear the money will shift from here to Saudi Arabia. To some extent, it may be the case, but when international investors would come to Saudi markets, it’ll benefit the neighborhood markets as well.

Going forward, how do you assess the overall investor sentiment in the UAE?

We are in a position of wait-and-see. The first half of 2013 was amazing for UAE’s stock markets but after that many investors got their fingers burned largely because of oil price slump and other issues. Now these investors are expecting new catalysts that I just talked about. Overall I believe this market is maturing and investors are learning that you can’t win all the time and you have to accept your loss, wait for some more time and then take wiser decisions. There is growth happening in the UAE and the region. Although there’s a little bit of fear because of geo-political factors, but at the end of the day the region is full of opportunities with a young dynamic population, who have deep faith in the future of the UAE and the region.

Any particular sectors you are most bullish on in the region?

I believe banking sector in the mid-term has lot of potential. The population is growing fast and new infrastructure projects are coming up that need bank financing. The banking sector though is facing some challenges, especially related to the deposits made by the governments which could come down because of the cheaper oil price making it a bit difficult for banks to lend. However, for smart investors this could be a good investment opportunity if he chooses wisely the timing of when to enter and exit banking stocks.

Are you bearish on any sector?

The real estate sector could face headwinds if the Russian rouble weakening lingers. Nevertheless, if the oil price goes up or new catalysts related to Expo 2020 projects come on stream, we can see investors getting excited back again.

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