RIYADH: As the world faces significant geopolitical and economic unpredictability, Michael Bolliger, Chief Investment Officer for Emerging Markets at UBS Global Wealth Management, told Arab News in an exclusive interview how the market has reacted to this cocktail of… ‘uncertainty.
The war in Ukraine, he said, has highlighted the high degree of differentiation between emerging markets. “Rising commodity prices are a challenge for importers like Turkey, Egypt and India as their external balances deteriorate,” he said. “However, they are a boon to oil exporters in the Gulf region. This distinction is evident in the recent divergence in sovereign bond spreads of importers and exporters.
Asked about the prospects for the Gulf Cooperation Council, he said it was an interesting time for the GCC and certainly for Saudi Arabia as well. “Important things are happening, especially around Vision 2030. We are seeing various projects taking shape and accelerating,” Bolliger added.
Volatile oil prices
Speaking about the global backdrop where energy prices are supported by the global economy emerging from the pandemic, the UBS CIO said he sees the trend of reopening accelerating. “Overall, the world has become much freer in terms of the movement of people, which means consumers have a greater ability to spend and the service sector in particular is doing well,” explained Bolliger.
This, of course, he said, also benefits the energy sector, in combination with the ongoing and likely growing restrictions on the supply side.
Bolliger pointed out that people just haven’t invested in oil facilities for quite a while now. “We already saw before the war in Ukraine that the limited supply growth was starting to influence energy prices,” he said. “And then we had the situation in Ukraine which added another step to that development, and energy prices went up again.”
He pointed out that this movement has become an important tailwind for this year and probably even for the medium to long term. “You look at the Saudi stock market and the region more broadly, and you see that asset prices are obviously starting to reflect the benign environment,” Bolliger added.
Asked about oil price volatility, Bolliger said it’s fair to assume that at least for the next two quarters, “we’ll see oil prices higher than what was assumed in their forecasts ago. three or six months.
He pointed out that the reason why this evidence from other countries affected by US sanctions suggests that it may take a long time for sanctions on Russian oil to go away.
With the release of strategic reserves in the United States and elsewhere, Bolliger thinks that at some point they might try to fill those reserves again. “It also means that we will see less impact on economic growth at this time and therefore less impact on energy demand for the next few quarters.”
While Bolliger expects energy prices to remain volatile – in terms of the level, revenues and volumes that Saudi Arabia or the GCC can export – he sees these as positive developments locally.
Assessing the performance of financial markets around the world today in light of the pandemic, oil price volatility and events unfolding in Ukraine, Bolliger said there was a lot on the material space. first as far as Russia is concerned. “People have to deal with the interruptions due to the sanctions and the risk of further sanctions. It initially triggered quite a bit of correction and volatility,” he explained.
However, Bolliger pointed out that commodity markets and prices have started to calm down a bit. “We see that, for example, when we look at the evolution of energy prices, this is also linked to the release of strategic reserves in the United States and elsewhere, which has acted as a stabilizer more recently.”
In this context, he said people are looking at other market drivers and what they are seeing is that the US economy is still doing quite well. “We are still seeing relatively solid growth in Europe and elsewhere. China has had a tough 2021 but will likely now also see brighter prospects for 2022,” Bolliger explained.
Despite all the terrible things happening in Ukraine, the CIO of UBS said people realize that the global economy could still do relatively well in 2022, leading to a rebound in risk assets.
Bolliger thinks that while one would like to focus on developments in Ukraine, “we must not lose sight of all the other things happening elsewhere.”
Specifically, he explained, what matters most is the outlook for monetary policy, with the Fed clear that it needs to do much more to contain inflationary pressures.
“It’s worth remembering that historically, whenever the Fed has actually started to raise interest rates, the market has generally reacted fairly benignly, at least for the next few quarters,” Bolliger said.
Saudi Arabia in the spotlight
Regarding Saudi Arabia, Bolliger said he was impressed that despite all the challenges the Kingdom is facing due to the pandemic, it has continued its trajectory of reform and its commitment to work towards Vision 2030. and diversify the economy.
“Furthermore,” he added, “even at the height of the pandemic, Saudi Arabia took fiscal tightening measures like introducing new taxes, etc.” Although it’s not a popular thing to do, Bolliger said, it shows the government is very serious about its medium and long-term plans, which is quite encouraging.
Recalling his recent trip to Riyadh, Bolliger said he was impressed to see how much the city had changed. “It just shows you there’s a lot going on on the pitch.”
With this tailwind and given the discipline to stick to the larger plan, he said, Saudi Arabia looks set to achieve some of the goals set out in its Vision 2030 at some point.
Despite many challenges, Bolliger added, the Kingdom also appears ready to transform its fossil fuel economy into other sources of revenue and income.
Asked about the latest investment opportunities in the region, particularly in Saudi Arabia, Bolliger said he likes the fixed income market. “We believe that investors generally do not fully appreciate the creditworthiness of various issuers in the region,” he added.
Also, on the equity side, he said, this year again looks quite promising for Saudi stocks at the index level, as it was the best performing emerging market in 2021. that people are quite optimistic. Increasingly, it is worth remembering that Saudi Arabia has become one of the largest markets in the MSCI Emerging Markets Index,” Bolliger said.
He said Saudi Arabia is currently number six among global emerging markets in terms of market capitalization. “And the trend is up,” he added.
Bolliger recalled that a few years ago many fund managers said, “Well, I’m just going to ignore this market because it’s small and I don’t understand it very well.” But he insisted that’s changing now, and it’s actually changing quite rapidly.