GCC markets offer opportunities in face of global recession

Creative Commons

The first half of 2022 has been extremely turbulent for most global economies. Markets are generally in deep correction territory.

The US’s Standard & Poor (S&P) showed its worst first half-year returns in over 60 years and most major international markets have followed suit.

No sector has been spared with the exception of energy. The breadth of the market decline is illustrated by the fact that over 90 percent of stocks in the S&P 500 declined for five out of seven days in the week prior to June 16. This was the first such occurrence since 1928.

• Saudi invests $7bn in US giants from Microsoft to Starbucks
• Currency will remain strong in the Gulf as rates continue to rise

A growing number of indicators point towards a global recession driven by a combination of tightening monetary policy, high energy and food prices, and a ruinously strong dollar.

Smaller and more vulnerable countries, such as Sri Lanka and Lebanon, are already in deep distress but even large economies are feeling the pain, including Europe and Japan.

Amid the uniformly gloomy global economic outlook, the GCC markets present a relatively bright spot of resilience. Not only have oil prices been high, but production has also increased significantly.

In Q1, oil production was up 12 percent year-on-year in the UAE and 19 percent in Saudi Arabia.

While the rapidly deteriorating global economic conditions will exert downward pressure on oil prices, short term supply constraints such as the war in Ukraine and long term factors such as the historic underinvestment in new production capacity are expected to keep prices relatively buoyant.

In other words, oil price-driven surpluses will likely continue to provide a strong tailwind for growth in the GCC over the medium term.

On one hand, regional sovereigns and private institutions are flush with liquidity just as international asset prices are crashing, presenting a window of opportunity to further bolster GCC wealth by securing high quality assets at discounted prices.

According to Bloomberg data, sovereign wealth funds from the GCC have been involved in at least $28.6 billion worth of acquisitions outside the Middle East and Africa this year. This is a 45 percent jump from the same period in 2021, and the most for any corresponding period on record.

The region also has the opportunity to achieve its long-term goals of economic diversification, import substitution and job creation through greater domestic investment.

Governments are certainly doing their part by implementing targeted policies and reforms including easing ownership rules, broadening access to capital markets, and establishing privatisation programmes. They are also directing significant investments into the domestic market.

On the private markets side, we are witnessing the emergence of managers across various alternative asset classes from equity to private and venture debt.

These managers act as conduits of investment into the economy – towards building a robust and sustainable private sector ecosystem, especially in the mid-market segment.

Significant capital is also being raised in the public markets across the GCC with $4.9 billion raised in Q1 compared to $571 million in Q1 2021.

Collectively, substantial new capital is making its way into domestic businesses in the GCC, strengthening balance sheets and funding growth.

Over the last five years especially, GCC leadership has made a concerted effort towards building long term value and sustainability.

Liberalisation of foreign investment, enhancing visa regimes and catalysing capital markets, and other initiatives, have created a facilitating environment for investments.

As the world braces for a looming recession, the GCC finds itself presented with the opportunity to go a long way towards achieving its long term goals.

Huda Al-Lawati is founder and CEO of GCC-led private equity firm Aliph Capital