With fiscal stimulus and deficit spending to remain integral in global macroeconomics, coupled with yield curve control and vaccine rollouts accelerating the evolution of a “new normal,” the investment landscape in 2021 may reflect a continuation of the reflation/momentum trade, albeit at increased volatility.
This is a key take-away from this year’s outlook letter by AD Investment Management (ADIM), titled “2021: Navigating Icarian Markets.” ADIM, regulated by the Abu Dhabi Global Market’s (ADGM’s) Financial Services Regulatory Authority (FSRA), is a Middle East-focused asset management boutique sponsored by Invest AD.
The firm’s forecasts for the MENA region highlight several considerations for investors, including:
- The opportunity to selectively find value in equities, despite the spike in valuations after the initial shock of COVID-19.
- The potential for this year to position portfolios for recoveries in stocks depressed by years of unfortunate cycle timing.
- A need to focus on low duration and deep value by screening for candidate businesses with relatively attractive valuations that can help to normalize in returns in a timely manner – in the bid to mitigate the risk of increasing interest rates disrupting the surge in equities.
“Markets in aggregate seem to be currently priced to beyond perfection, where a lot needs to go right on the path to projected growth for them to justify their valuations,” said ADIM’s Annual Outlook Letter. “Even then, they are not offering the kind of returns one would hope for over the next decade from where we are today.”
Amid expensive assets across the spectrum, the firm believes that a good hedge against the inevitable reversal of the momentum trade could be growing exposure to selective names that correlate with these factors.
“We cannot predict the timing of that reversal, but we know we are moving closer to it with every passing day,” added the Letter.
A selective approach in the Middle East
By staying focused in its convictions, ADIM sees various themes within MENA states that can provide resilience and performance in portfolios this year, and beyond. For example:
- In healthcare, mandatory private sector cover in Saudi Arabia is an example of why investors should be bullish, with downside risks from an expat exodus from the GCC now counterbalanced by relaxed residency measures.
- Strong fundamental drivers underpin the potential in education. In Kuwait, for example, 2020 was a litmus test of the government’s commitment to upholding scholarship schemes which should, in turn, continue to support private sector higher education providers.
- An eco-friendly, innovation-driven future bodes well for global demand for petrochemicals, driven by advances in sectors like technology, transportation and construction.
- Several emerging e-commerce platforms in MENA will likely mature into a concentrated ecosystem of marketplaces and order fulfilment service providers, in line with online retail retaining some of the share it has gained from traditional outlets.
- Regional tourism has a bright outlook over the next two years, with the 2022 World Cup in Qatar, plus routes re-opening routes between the GCC and Qatar, as likely demand drivers.
Leveraging appetite for sustainability
The report also notes the region’s steepening awareness regarding climate challenge and highlights the opportunities and concrete steps being taken by leading regional National Oil Companies to reduce the carbon footprint. Moreover, the region’s mineral wealth coupled with the adoption of investor-friendly mining laws may contribute to improving FDI. This is based on the expected secular demand for industrial metals that is supported by the theme of “electrification of everything” and the decarbonization of the electric grid.
About AD Investment Management
AD Investment Management (ADIM), a specialized Middle Eastern asset management boutique, is domiciled in the Abu Dhabi Global Market and regulated by the ADGM’s Financial Services Regulatory Authority (FSRA). Founded in 2019, ADIM is a subsidiary of the Abu Dhabi Investment Company (Invest AD). Abu Dhabi Investment Company was established in 1977, by decree of the late President of the UAE, HH Sheikh Zayed Bin Sultan Al Nahyan. Abu Dhabi Investment Company is a subsidiary of the Abu Dhabi Investment Council, which is a part of the Mubadala Investment Company owned by the Government of Abu Dhabi.
ADIM’s mission is to provide clients, capital markets and shareholders with sustainable investment solutions by committing smart people, independent financial thought and disciplined processes.