11 minute read
Going Forward
Rasha Badawi Head of Barclays Private Bank in the UAE gives MEA Finance her thoughts on the key features and landmark achievements of 2021 and how they provide us with a glimpse into how 2022 will take shape and what some of the lead trends and considerations will be for the regional and wider global markets
Rasha Badawi Head of Barclays Private Bank in the UAE
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Despite recent turbulence and uncertainty, there is no doubt that the global economy has strongly grown this year, even if the pace is now slowing. 2021 will go down in the economic annals as one of exceptional growth. A mixture of the improving health situation, relaxing of restrictions and ongoing aggressive policy support that allowed the global economy to expand by around 6.1% and emerging markets by 6.8%.
The biggest vaccination programme in history has been the key to the surge in activity, especially in the UAE who is leading on global rankings for vaccination rates and where, according to government officials, at least 91 percent of the country´s population has received one dose of the vaccine and 80 per cent has taken both doses. The rapid discovery of vaccines has allowed economies to reopen and activity to resume at speed. However, this “stop and go”, on a massive scale, has created unprecedented frictions in supply chains and parts of the labour market. As a result, inflation (and increasingly stagflation) fears, as well as concerns over the path of interest rates, are at the centre of the wall of worry that investors are trying to climb. We expect these issues to dominate the narrative next year again, at least in the first half.
While not eradicating the virus, the vaccines have proved to be highly effective in breaking the chain between case numbers and severe illness. Our expectation is that the virus will evolve to become endemic, rather than being arrested. This disruption will continue to affect growth prospects in 2022, when the world is likely to grow robustly although we acknowledge that the peak of the pandemic recovery has passed.
As the world moves on from the pandemic, 2022 is likely to be characterised by slower economic growth, higher inflation, elevated volatility, and ultimately outperformance of equities over bonds. In this uncertain environment, proper diversification and active
management will remain key to improve portfolio performance.
The first impact will be felt on monetary policies. After doing “whatever it takes” to support their economies, we expect central banks to accompany this transition to the new normal by removing some of the stimuli they introduced during the crisis. This should translate into increased volatility in rates and currencies markets. It will also likely promote more frequent sector rotations and pronounced dispersion in stock markets.
The outlook for inflation will also be a significant influence on equities. Despite above-trend growth, marginally less accommodative monetary policies may weigh on valuations. As a result, we expect returns on the asset class to be more muted in 2022. In terms of sectors, healthcare and technology will continue to exhibit very attractive long-term growth prospects. However, their performance could be challenged in the short-term should interest rates rise.
But returns and volatility are only part of the equation. In the wake of the UN’s COP26 climate change conference and ahead of the UN Climate Change Conference (COP28) to be hosted in the UAE in 2023, building portfolios that can capture potential green investment opportunities, while simultaneously guarding against climate risks, will matter for investors in the Middle East. Environmental, social and governance considerations are here to stay, and will likely continue to influence investors’ choices in 2022 and beyond. They will also potentially play a key role in directing additional government spending, while contributing to volatility in the commodity space as the energy transition gathers pace.
The rapid digitisation and ongoing investment in technology will continue. As baby boomers slowly transfer their wealth to future generations, the way clients want to deal with their private bankers evolves rapidly. We (and the industry in general) have had to adapt fast to the evolving needs of younger wealth creators and rethink banking given the higher digital engagement seen in the past months, which will continue to redefine relationship management in a digitally connected world.
The pandemic has made it clearer that it is increasingly important for private banks to provide a more engaging and personalised digital experience to clients. We have to continue to anticipate and adapt our business model to the
challenges of these times and respond to the changing needs of our clients. During this time, we’ve seen lots of clients become new users of our digital offering, connecting to their accounts on their smartphones or PCs to use our transfer, FX and securities online trading capabilities in which we will continue to invest significantly. the advantages of building a high quality and diversified portfolio that can stand the test of difficult times. Our message for investors is that being and staying invested continues to make sense, although one should be prepared for more elevated volatility, and potentially slightly lower-than-average returns in 2022.
What makes you feel optimistic about 2022?
Despite recent turbulence and uncertainty, there is no doubt that the global economy has grown strongly this year, even if the pace is now slowing. We expect post-lockdown inflation to remain elevated in early 2022, but to ease later in the year as supply bottlenecks and other economic frictions subside.
Starting in 2022, and assuming that
vaccine resistant variants don’t spoil the party, we believe that COVID-19’s status will transition from pandemic to endemic, making it akin to the seasonal flu. This process won’t happen overnight, and outbursts of infections are highly likely. But these should only be a marginal drag on global growth, rather than the unprecedented shock seen eighteen months ago.
Considering the relatively accommodative policy stance, recovery in labour markets and strength of the global consumer, we expect that 2022 will deliver another year of impressive growth, with the global economy growing by 4.5%.
How well equipped is the regional financial sector to handle a black swan event in the coming year?
Whilst no one can predict a black swan event, I believe the pandemic has helped investors understand the importance of active management and
Upping the Pace
Baber Khan Chief Operations Officer at OCS International Finance Ltd sees the coming year as one where the GCC will perform well and activities such as IPO’s, M&A, positive trends in FDI and business reforms all contributing to an upward swing in sentiment
There has been a focus on costs and efficiencies which when coupled with the increased digitization of processes, has helped provide a more sustainable foundation of growth for the future. It has also helped the regional banks deliver positive results Q-o-Q in 2021.
Subsequently they were better able to respond to the impact of Covid 19 and the resulting government and central bank actions. 2021 saw a shift in sentiment towards digital assets and cryptocurrency related services. This has been on the back of adoption blockchain technology led by governments in the region with the central banks of Bahrain, UAE and Saudi Arabia forming committees to oversee the
Baber Khan Chief Operations Officer at OCS International Finance Ltd implementation of CBDC (Central Bank Digital Currencies). Rules and Regulations are being formatted by regional regulators (e.g., ADGM) to meet the growing retail and institutional appetite for digital currencies. We have already had the launch of the first Bitcoin fund on Nasdaq Dubai and a Digital Asset Exchange obtaining investment from an Abu Dhabi sovereign wealth fund entity. We are seeing increased interest and excitement over the potential of digital currencies in the region.
The regional economies of the GCC will naturally benefit from the higher oil prices and increased government spending/investment and coupled with the lessons learnt from Global Financial Crisis in 2008, will be more resilient to sudden shocks. Reforms related to ease of business, easing of Covid 19 restrictions, return of global trade and tourism driven by a successful vaccination programme all augurs well for the economy and this makes me very optimistic for the year ahead. Unfortunately, this optimism is tempered by what is happening in Europe currently with COVID and a possible domino effect. Regional peripheral economies of the GCC i.e., Iraq and LEVANT region will continue to suffer from the impact of Covid and political instability.
Do you expect the pace of IPO’s, M&A, equity and debt issuance and general capital markets activity differ in 2022?
The pace in 2021 is expected to continue,
especially in equities with the IPO listing of government owned entities such a DEWA and Salik in Dubai and some family-owned businesses too. M&A activity has remained buoyant in 2021 with the trend set to continue into 2022 with activity in technology, energy, and utilities anticipated to continue. FDI into the region has also seen a growing trend which has led to the to the first SPAC (Special Purpose Acquisition Company) transactions emanating from the region i.e., Anghami (music streaming business, based out of Abu Dhabi) and Swvl (ride hailing firm operating in MENA, based out of Dubai). As the economic outlook has improved, supported by higher energy prices and low rates, debt issuances in 2022 is anticipated continue the positive trend of 2021. The stabilizing macroeconomic picture would offer investors and lenders comfort when regional oil related economies look to refinancing and pushing out maturities whilst locking in lower pricing and rates.
The experience of pandemic in 2020 and the global focus on digitization was a trigger for regional banks to fast track their digitization plans to avoid being left behind, and partnerships with FinTech firms and the adoptions of API’s, not remotely a consideration a few years ago, were embraced. Regional banks have adapted quickly and become more flexible not just due to customer demand but also by government measures to push digitization in government services. 2022 and onwards will show continued investment with Buy Now and Pay Later entering the market and challengers in the form of neobanks, the presence of regulatory sandboxes in the region is also driving FinTechs into diverse verticals such as wealth management and insurance, payments which is setting the tone to regional banks to adapt and recognize the growth in digitization.
The main sectors will be on retail and SMEs with primary focus on the latter. The target will be young entrepreneurs /start-ups who find dealing with a regular bank alien and whose needs at the outset are very basic until their operations can develop economies of scale. Digital account opening and services to SME’s is the area of growth and development driven to a large extent by government policies and incentives. Supporting e-commerce,
given the growth it has experienced in 2020, is also encouraging regional banks to offer payment services via in-house offering or through collaborations with registered FinTechs.
What makes you feel optimistic about 2022?
The GCC economies are anticipated to return to their pre Covid 19 GDP growth rates which will have a positive impact on overall sentiment and business activity
however, there are the headwinds of inflation and global supply chain issues that need to be negotiated. With global focus on climate change the regional governments and banks are looking to execute their bold sustainability and ESG plans which brings with it more exciting opportunities and areas of investment. On the subject of digital assets and crypto currencies, the optimism experienced in 2021 is expected to continue with the UAE being at the forefront of new technologies and innovation. UAE efforts to be a hub for digital asset service providers is a trigger for further activity in the space but also addressing some of the apprehensions and misconceptions related to digital currencies.
THE PACE IN 2021 IS EXPECTED TO CONTINUE, ESPECIALLY IN EQUITIES WITH THE IPO LISTING OF GOVERNMENT OWNED ENTITIES SUCH A DEWA AND SALIK IN DUBAI AND SOME FAMILY-OWNED BUSINESSES TOO
Black swan events are by definition impossible to predict and consequently more difficult to prepare for. The current balance sheets and capital structures are robust amongst banks in the GCC to withstand any unforeseen circumstances with the expectation of possible intervention from the respective central banks. The impact of the GFC was a lesson and provided an incentive to the regional banks to be better prepared for sudden shocks. The reaction of the Regional Governments and Financial Sector to the outbreak of Covid 19 in 2020 was very impressive and should provide an element of comfort that they can manage the next unforeseen event.
