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ANALYSIS

Ajay Dayal

Global inflation rates not slowing down, say experts

DUBAI, September 21, 2022

Inflation remains a key concern amid growing macro headwinds and most developed economies are experiencing 8-10% inflation rates and these are not yet slowing down, said an industry expert.

“Valuations globally have come in dramatically in 2022. Japan, the UK and the Eurozone look particularly attractive on a valuation basis compared to the 20-year average,” added Ajay Dayal, Director, Client Portfolio Manager, ClearBridge Investments.

“We have seen a shift from growth to value investing in recent years. This has been playing out so far in 2022 with value stocks outpacing growth by about 15% and the P/E differential narrowing.

 “We see opportunities in secular names, with the infrastructure sector in particular continuing to develop. Historically, the asset class has been underappreciated by markets, even though infrastructure companies typically provide stable cash flows and dividend payouts. Water, electric, gas and renewables companies are driven by long term multi decade growth due to decarbonization goals globally and improving the resiliency of existing infrastructure because of the effects of climate change.  This secular growth story helps make them a defensive asset class.

 “The role of renewables is growing, with approximately $800 billion dollars invested yearly in the power sector. To reach net zero by 2050, we estimate this figure show grow to $2.5 trillion dollars a year, and a significant portion of this allocated to renewables. Russia’s invasion of Ukraine has prompted a need to move faster to renewables,” he explained.

Meanwhile, William Vaughan, Associate Portfolio Manager & Senior Research Analyst, Brandywine Global, said: “Central banks have never been more hawkish. With slowing growth and increasing potential for a recession, a multi-sector approach to investing remains key. Rapid slowing of very elevated money growth suggest core inflation could revert to 2% by mid-2023.

“Corporate profits are set to contract. We saw profits supercharged after an unprecedented monetary and fiscal response to the pandemic, but now see the tide turning.

“We see select opportunities in emerging market bonds. Brazil is one and we see credibility in their central bank. Inflation is peaking in Brazil and potential forward returns look strong.

“US treasury bonds in particular look attractive amid the world economy slowing, a European energy crisis, ongoing lockdowns in China and other factors. We are more muted on the opportunities in the 10 year than the 30 year.”

“Credit spreads could get much wider. We see opportunities in Euro denominated names of US companies that have exposure in Europe as well as high quality, short duration names in the U.S. high yield space.”

Dino Kronfol, CIO, Global Sukuk and Mena Fixed Income, Franklin Templeton, said: “GCC Bonds’ defensive characteristics stood out once again.  YTD performance demonstrates resilience in the face of EM sell off and rates volatility.  GCC declines are half the declines of Emerging Markets.

“The Ukraine and Russia are remote from the GCC and the linkages are limited, which together with higher oil prices, supports the relative strength of GCC markets.

“Issuance has been impacted by market volatility, with bonds and sukuk down 57% relative to 2021. Bonds are also losing market share to loans, dropping to 30% from 56% in 2020.  We expect GCC issuance to end the year below $60 billion, down from previous estimates of $90 billion.

“Saudi Arabia is rapidly developing its bond markets. Saudi Arabia today represents 52% of GCC bond markets, up from 18% in 2015, and is currently on track to unseat Malaysia as the largest issuer in global sukuk markets, with 36% of global Sukuk issues.

 “The transition to low carbon will persist as a theme, and the GCC has stepped up its commitments and started funding projects that diversify the region’s energy mix and reduce oil and gas production emissions.  These developments are very welcome and will create enormous sustainable financing needs.   

“The Fed remains convinced of a soft landing for the economy, but inflation may realistically only normalize in a downturn, with higher unemployment. History offers little comfort from periods where unemployment rises, even by small margins. Few markets, if any, are currently priced for that risk including Global Sukuk and GCC bond markets.”

“Absolute yields are approaching the highest levels in 20 years, excluding the global financial crisis.  With a history of 12-month forward returns from similar yield levels consistently delivering double-digit returns, valuations are compelling, particularly for higher quality issuers.

“Despite the risks, or rather because of the abundance of risk, higher-quality fixed income assets are poised to better defend portfolios, especially those with active mandates.”

Salah Shamma, Head of Mena Equities, Franklin Templeton Emerging Markets Equity, said: “GCC economies continue to be resilient amid global uncertainty. Buoyed by higher commodity prices, robust balance sheets and a steady growth outlook, inflationary pressures and growth prospects remain well balanced in the region.

“Higher oil prices are expected to alleviate the debt burden of some of the more challenged economies in Mena. For others like Saudi Arabia, these higher prices significantly boost the government’s ability to pursue its growth and diversification agenda without materially deviating from fiscal consolidation goals.”

“The GCC banking sector continues to be a key beneficiary of rising interest rates and a robust growth outlook for the region. We expect GCC banks’ earnings to be well supported by improving margins and stronger lending.

 “The liquidity story in the Mena region is potentially still in its early chapters. The weight of the region in global emerging market indices has steadily increased over the past five years to 7-8%, and we expect it to rise to more than 10% in the medium term, driven mainly by foreign ownership limit removals in Saudi Arabia and the UAE, as well as expected IPO inclusions.

“Global emerging market investors’ positioning in the GCC is increasing yet remains low, though high energy prices, ongoing market reforms and a healthy IPO pipeline could attract further active flows into the region.

“Valuations in Saudi Arabia remain elevated versus historical averages and are well supported by ample liquidity and continued investor optimism. Going forward, market performance will likely be contingent on an improving earnings outlook, which would support these higher levels.

“The GCC’s IPO issuances had a standout year in 2021, driven by a sharp economic recovery, a bounce back in oil prices, a pickup in overall sentiment and a continuation of critical reforms. This year is shaping up to be one that builds on the successes of 2021, further broadening the GCC investment universe and expanding companies’ access to capital markets. Strong post listing performances should continue to provide the needed momentum to push forward more IPOs in the pipeline.

 “Egypt’s economic vulnerabilities, as one of the largest importers of food grains and energy, have come to the forefront with global supply-chain bottlenecks being further exacerbated by the Russia-Ukraine conflict. An IMF deal and ongoing economic reforms to address these vulnerabilities are critical for the country to attract new international investors.” – TradeArabia News Service




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