Gulf investors should hedge rising macro risks with Asian assets

GCC investors face draconian macro risk as the American economy heads towards stagflation

March 3, 2025, 4:26 PM

Factory workers in Chennai. Emerging Asian countries such as India, China, Indonesia, Malaysia, the Philippines, Thailand and Vietnam, looks to be the most attractive destination for GCC investors seeking to escape risks

The Trump 2.0 era has escalated uncertainty risk in financial markets. This is the main reason behind the mini-meltdown in US equities last week and a 30 percent rise since the inauguration in the Vix, the Volatility Index, or Wall Street’s gauge of greed and fear.

GCC investors, with their disproportionally overweight positions in US assets, face draconian macro risk as the American economy heads towards stagflation and a potential depreciation of King Dollar.

In this scenario, a pivot to Asian equities could provide diversification and dampen portfolios’ downside risk, which is highly correlated with a touching belief in eternal American exceptionalism.

The biggest macro risks for GCC investors from Trump 2.0 are his “Drill, baby, drill” ethos, combined with a determination to bulldoze a peace deal on Ukraine with Putin that could lead to sanctions relief for the Kremlin.

This is the reason Brent crude prices have fallen from $82 a barrel in mid-January to $72 a barrel currently. This 12 percent fall in six weeks is not positive for the fiscal deficits of GCC states, whose budget breakeven prices are between $20 and $35 above the current spot Brent price.

Thus, it is entirely possible for valuation multiples in GCC equities to contract as Brent falls to $60 a barrel, or even below $50 a barrel, once post-sanctioned Russian oil and gas flood the global wet barrel market.

King Dollar is also down 3 percent from its trade-weighted index peak as the US Treasury note yield fell from 4.8 percent on January 13 to 4.22 percent. First-quarter economic growth in the US has decelerated to 1 percent, according to the Atlanta Fed GDP Now flash estimate.

US consumer confidence plunged by a ghastly 7 points last month. Inflation breakeven rates have crept up well above 3 percent in the Treasury TIPS (inflation protected securities) market. There was absolutely no monetary rationale for Powell’s Fed to cut the Fed Funds rate at the December Federal Open Market Committee (FOMC), and there is no logic for a rate cut in 2025, as inflation is so far above the central bank’s 2 percent dual mandate target.

Since GCC currencies cannot devalue, the burden of adjustment will be felt on stock exchanges and in property markets

Elon Musk and his Department of Government Efficiency (DOGE) have guaranteed that the unemployment rate will spike above 4 percent this spring/summer as entire agencies such as USAID are arbitrarily mothballed and tens of thousands of federal workers are fired.

At the same time, DOGE’s planned $1 trillion of government spending cuts have gutted consumer and business confidence, local economies and state budgets.

This means the Powell Fed is on a collision course with the Trump White House, which will double down on its insistence that the FOMC slash interest rates. An American economy mired in stagflation and a political clash between an ostensibly independent Fed and an imperial president means King Dollar may well be dethroned at a time when it is already on the macro ropes.

GCC investors are dollar-based, and must thus protect their wealth by accumulating non-dollar assets. In my view, emerging Asia is the most attractive destination for GCC investors seeking to escape dollar, oil price, geopolitical and Trump 2.0 dissonance risks.

My Dubai perch gives me a panoramic view of the most spectacular real estate bubble I have ever seen. Here. I lived through the speculative manias that swept Spain on the eve of the global financial crash in 2008, Tokyo 1989 and Bangkok 1997 just before the Asian flu nemesis.

The two secular bear markets that hit Dubai in 2009 and 2014 saw home prices plunge by 50 to 60 percent, and lasted up to six years. Both these bearish property cycles were triggered by a spike in global liquidity risk, to which asset values in the GCC are exceptionally sensitive, because of the dollar peg.

What could be the catalyst for another spike in global liquidity risk in 2025? For the past 12 years, the Bank of Japan has used its balance sheet to keep interest rates as close to zero as possible, even as the yen has plunged from $1=¥76 in 2012 to $1=¥151.

Yet inflation and wages are rising alarmingly in the Land of the Rising Sun, and the Bank of Japan must now raise interest rates to revalue the yen against the US dollar. This makes inevitable a replay of the carry trade meltdown and global equity squeeze we saw last August, but on a far more sinister scale.

The smart money on Wall Street knows that Japanese institutions will have to dump almost a trillion dollars in global bonds and equities to repatriate offshore wealth to help stabilise the Japenese government bonds market. This is the meaning of financial repression, or yield curve control. So, the yen rises to ¥120 against the dollar, treasury bonds and Western stock markets plunge and the real estate bubble in dollar-pegged currencies such as the GCC implodes.

GCC investors must hedge against this risk, whose fallout also means credit distress and recession amid oil price angst. Since GCC currencies cannot devalue, the burden of adjustment will be felt on stock exchanges and in property markets.

Japan and China have debt-to-GDP ratios above 260 percent. A shift in Tokyo’s monetary regime, and, yes, Beijing’s, will cause a spike in global liquidity risk on a scale which few investors in the GCC can imagine. This time, the wolf is here.

Matein Khalid is an investor in global financial markets and board adviser to leading family offices in the UAE and Saudi Arabia