Sticking by Uncle Sam? The quandary for UAE investors amid strong US dollar

The Lebanese wealth manager Zayan El Ahmadie likes his US stocks and the strong US economy, which is fuelling a strengthening of the dollar.

“I studied in the US and I believe in the US economy. I will always have a sizeable allocation to blue chips companies: technology and healthcare sectors, and smaller exposure to mid-cap and small cap US companies,” says the 35-year-old.

But the stronger greenback is making Arab expats like him favour more European stocks because of the cheaper euro.

“I would invest in European equities, especially those of trading nations such as Germany, England and France. The valuation of European equities, price to earnings ratios, is better than their US counterparts.”

The greenback has strengthened against all major currencies, including the euro, in recent months as the US economy grows while global economic growth falters, especially in Europe. The sagging euro is a boon to the Arab World, where most currencies are pegged to the dollar.

The 19-nation currency hit an 11-year low in January after the European Central Bank (ECB) announced plans to launch a bond-buying programme known as quantitative easing, that will inject the euro-zone economy with cash and help to fight deflation.

“The ECB just had quantitative easing and the Australia Reserve Bank cut interest rates to record lows, in response to tumbling oil prices and deflation worries,” says Mr El Ahmadie. “The US job market and housing market has improved dramatically in the last couple of years, and the Federal Reserve is considering raising interest rates soon. This makes me believe that the US dollar is going to remain strong against other major international basket of currencies.”

Despite his affinity to US stocks, a diversified approach is best, says Mr El Ahmadie, a UAE resident for the past two years.

“Personally, I try to diversify my investments,” he says. His investment portfolio looks very varied: 65 per cent in equities, with 50 per cent exposure to US equities, 35 per cent to European equities with euro denomination and 15 per cent in emerging and frontier markets. Another 25 per cent of his investments are in fixed income, with a global exposure to bonds. The remaining 10 per cent is in commodities, mainly in exchange traded funds (ETF) and a minor Gold ETF exposure. ETFs behave like stocks and are linked to indexes, mimicking the performance of a financial index.

But it’s his 35 per cent allocation to European equities that is interesting. Arab expat investors, such as Mr El Ahmadie, are focusing on European stocks because the stronger dollar could affect the profits of US firms that have businesses abroad. Of the S&P 500 companies that report foreign sales, 46.3 per cent of all their sales were produced and sold outside the US, according to the S&P 500 2013 Global Sales report.

“There are many US firms set up outside of the US. In the long run, such a strong dollar may end up being a negative factor affecting their profit margins,” says Pradeep Unni, the head of trading and research at Dubai-based Richcomm Global Services, an international commodity services company.

“Many Arab nationals have investments in US stock markets and any such decline will only lower their profits. ”

However, for the Arab-American banker Ibrahim Kamalmaz, 26, US stocks still remain attractive in the short term.

“A lot of positive news is coming out of the US,” says Mr Kamalmaz, who has been in the UAE for five years.

Such news includes the US economy growing 2.4 per cent last year, the highest growth rate since 2010. The economy added 295,000 jobs in February, with the unemployment rate falling to 5.5 per cent, the lowest since May 2008.

About half of Mr Kamalmaz’s investments are in US equities, including US technology companies and Indian banks and Chinese technology companies listed in New York.

Another 30 per cent are in UAE equities, which have taken a beating since the fourth quarter of last year because of the tumbling oil price. The Brent oil price has lost around 50 per cent of its value since June to around $60 a barrel because of an oil supply glut sparked by the US shale oil boom.

“The stronger dollar may be adding to the suppression of the oil price. This directly impacts the UAE and Arabian Gulf as a significant portion of the GDP is from petroleum-related exports,” says Mr Kamalmaz.

“Foreign investors may be reducing exposure to the UAE, expecting a slowdown in development across the country as the government cuts back on new projects and GDP growth is expected to be weaker than previous years. That’s why the UAE equity market hasn’t been as strong as it was in 2014 before the oil price correction.”

The UAE resident says he is now considering trimming his UAE/US exposure and investing in Russian distressed debt owing to the devaluation of the rouble against the US dollars. The rouble lost more than 40 per cent of its value against the dollar last year because of the plummeting oil prices and the economic impact from western sanctions slapped on the energy-exporting country because of its military involvement in Ukraine.

“I am considering distressed debt such as Russian bank bonds issued in US dollar with short maturity – less than one year. The spreads are attractive and I believe the Russian government will continue to support the econony and we won’t see a default for a while,” adds Mr Kamalmaz, who says he would also like to increase his exposure to India.

Expat Arabs currently favour Asian stocks because oil-importing Asian economies are benefiting from the low oil prices, according to Bharat Pratap, the director of business development for the Middle East and India at the Swiss private bank Pictet Asset Management.

Mr Pratap says his clients were trying to cut exposure to cash in euros and pounds sterling because of unattractive interest rates for those currencies.

Mr El Ahmadie backs the current interest in emerging markets, with India his top choice.

“It has good industrial production, and world sentiment and confidence in the Indian markets is strong. India relies a lot on oil and cheaper oil prices help their profit margins,” says Mr El Ahmadie. “I also like Indonesia, Thailand and the Philippines. However, a stronger US dollar will put more burden on emerging markets with high national debt levels. As their debt is in US dollars it will cost them more to service their commitments.”

The volatility in the oil price, however – which has risen since reaching a year-to-date low of $45 a barrel in January – is keeping Mr El Ahmadie away from investing in commodities. He also has limited exposure to gold.

“Gold is great to hedge against inflation. However inflation is low in most developed countries, actually there is fear of deflation,” he says. “Also equity markets are doing well the last few years, so very few people are parking their cash in gold.”

Closer to home, investments in Egypt are more attractive for Arab expats because of the recent devaluation of the Egyptian pound against the US dollar. The pound has sunk 4.7 per cent to 7.53 per dollar so far this year.

“Any further depreciation would make investments in Egypt more attractive to the rest of the Arab world,” says Jaap Meijer, managing director of equity research at Dubai-based investment bank Arqaam Capital.

But with so much turbulence in the investment world, Mr El Ahmadie says the most important thing for any investor is to understand their risk appetite.

“This will vary from one person to another depending on the person’s age, social status and total assets that a person possesses,” he adds. “Individuals should tailor make investments according to their financial goals, and their investment time horizon.”

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