Last week I was in the Middle East, meeting some of the world biggest investors. It was good to see old friends and meet new ones as well.
It was an especially interesting time to debate markets given we have just had the first 10% correction in the S&P since early 2016 and 10-year US treasury yields have gone up 0.5% in just a few weeks.
It became clear to me that there is plenty of money on the side-lines in the Middle East that is waiting for a market pull-back before increasing equity exposure. Many people I met mentioned that they had been quite cautious so far; some have already been cautious for more than a year. My assessment is that most are underinvested compared to their long-term goals.
There was general agreement with our view that this correction is not likely to be the beginning of a bear market, but perhaps surprisingly almost none had increased exposure so far. Most remained nervous, but are also not sure what the next market regime will look like. I would expect to see more money going into markets if we see a move back to ‘normal’ for a few weeks. But believe me, I know it hurts to wait for a correction and then just miss it.
Some local investors have refreshingly long investment horizons, with a multi-year outlook. Over this long-term perspective, few see obvious long-term value anywhere. We agree.
We debated our three long-term themes intensively: most agreed with our view that energy stocks are cheap compared to oil prices, but that might be a confirmation bias of the region. Not many pushed back on our view that India could develop into a significant growth engine for the world. Clearly the region has many links with India already. Our preference for buying European utilities as a value play, and because it could be the most hated sector in Europe, probably still needs some persuasion.
Gold always gets mentioned in the Middle East, as trading in the precious metal and a love of gold jewellery are part of the region's heritage. Long-term investors in the region typically like to have a portion of their portfolio invested in the yellow metal. So do we. Some agree with us in the long-term bull case for gold, with so-called helicopter money as a logical next step in the next recession. Others own gold for a more diverse range of tail risks. Short-term traders are more afraid of the impact of real yield rises and dollar strength on the gold price. So being long gold definitely does not feel like a crowded trade to me.
No-one asked me about bitcoin for a change. It may be past its hype, or that people got burned and are too proud to bring it up, but most likely its because people see it as a gamble rather than an investment. We have a similar perspective.
In general, people are optimistic on markets in the region. They may well be right, with the planned IPO of Saudi Aramco likely to bring more focus and liquidity to the region. My Saudi friends were probably the most optimistic I have ever seen them, both on markets and otherwise. Good for them.
Lastly, we got lots of interest on Brexit. This is probably not too surprising given the significant investment in the UK from the Gulf in the past few decades. There is lots of vested interest and they are nervous.
Luckily, some remembered our successful trade being short the pound in the run-up to the EU referendum and then long the pound after it weakened all the way to 1.2 versus the US dollar (keeping an honest record of views through our blog pays off as some of these clients have been following us since the early days). I’m not sure whether our view that 'the market is pricing Brexit risks quite fairly at the moment' did anything to alleviate local concerns.
Apparently David Cameron is in the region this week and one of our contacts very kindly invited me to stay longer in the Gulf and attend a meeting with him. I’m sure he has a great perspective on the matter but unfortunately I need to be in snowy London this week.
It was a great trip in the Middle East. I'm looking forward to being back in the Gulf soon, Insha'Allah.