The 14th Annual One on One Conference 2018 Shifting
Benchmarks

5 - 7 March 2018 | Atlantis, The Palm, Dubai, UAE

Regional Outlook

Shifting dynamics for oil and the USD, weaker commodity prices and a pivot in Chinese-led growth and several regional policy reforms and political turbulances are among the key themes at play in 2018. Global investors will be carefully watching where these new benchmarks settle as they look for opportunities to deploy capital and capture growth from some of the world's fastest growing and rapidaly evolving economies.

A shifting global dynamic

Two key variables, the USD and oil prices, are likely to influence investment decisions in 2018, with both expected to trade within a range during the year. For the dollar, a rising Federal Funds Target Rate (FFTR) will be balanced by the likelihood of a rising fiscal deficit as the Trump administration pushes through tax cuts. Meanwhile, the changing shape of the futures curve for oil reflects concerns about rising supply and weaker demand growth in the medium term, limiting the upside risks despite OPEC's agreement to extend production cuts.

Outlook for China and impact of FEM

Industrial commodity prices are likely to be weaker in 2018 as China's government focuses on quality rather than quantity of future growth. Side effects of such policies include rising nitrogen fertilizer prices and good long-term growth in demand for natural gas. China will likely continue to invest heavily in key frontier emerging markets (FEM), supporting growth and improving infrastructure. It is possible that these capital flows could leave FEM currencies looking overvalued.

Supportive economic policies make for promising markets in MENA and FEM

Foreign capital flows are likely to continue favoring Egypt as the country delivers on its economic reform program, with falling interest rates and accelerating growth set to drive strong stock performance and positioning Egypt as a top pick within MENA and FEM. Nigeria is also at the forefront of FEM, where last year's devaluation, the recovery in oil prices and attractive valuations together promise good returns.

Potential FTSE and MSCI market upgrades bode well for passive flows

The continued increase of passive-managed funds is likely to ensure a big bang for the pending FTSE and MSCI upgrades in Kuwait and Saudi Arabia (passive flows will be well over USD10 billion for KSA). Meanwhile, Vietnam, a major frontier market, still has work to do on FOLs before it can join the watch list for an MSCI upgrade. It's also likely that new benchmarks for investing in smaller emerging and frontier markets will emerge over the next few years.

Elections and political impact on MENA and FEM

Political overhangs partly explain the large valuation discrepancies between FEM countries in late 2017. Elections will be a key focus in 2018, notably in Pakistan with the ruling party having faced difficulties in 2017. The political timetable could also affect reform momentum in Egypt, Nigeria and, potentially, Lebanon. Meanwhile, investors in Saudi Arabia will be looking for clarity on the government's plans to revive growth after several difficult years. With Qatar being one of the worst performing markets of 2017, value has clearly opened up, but lasting recovery in that market is unlikely until the political outlook in the Gulf has improved. Overall, tensions within MENA are likely to mean that regional markets will trade at a discount for EM peers.