“Economies in the Middle East and North Africa (MENA) face a different set of policy challenges in 2014,” Talal Al Zain, Chief Executive Officer of PineBridge Investments Middle East, said.
Al Zain believes that while economies such as Egypt are working to stabilize their political systems, others, such as GCC countries need to do more on diversifying their revenues base with less dependency on oil.
“We expect economic growth across the region will increase moderately during the year, helped in part by higher oil production and concur with the IMF’s forecast of 3.8% real GDP growth for 2014 (up from 2.1% in 2013). In the longer term, a growing young population, increasing consumption and rising budget expenditure should overcome policy challenges in many of these countries, creating promising conditions for investment,” Al Zain added.
“The global economy will see a modest uptick in growth in 2014, with the US GDP growth accelerating to 2.6 percent as businesses increase investments, while the Eurozone and China maintain their current growth trajectory but politics, particularly in the United States, could hamper the recovery,” he added.
“The Middle East, North Africa (MENA) and Turkey are increasingly fertile ground for private market activity. High rates of economic growth are fostering the development of local small and medium-sized enterprises, which have substantial financing requirements. Investors and business owners need to access growth capital to seize opportunities ahead of competitors,” Al Zain said.
On the global front, PineBridge Investments Chief Economist Markus Schomer believes rising capacity utilization and slowing productivity gains will increase the need for US businesses to invest, which should result in higher economic growth. But political wrangling over the debt ceiling could hamper corporate investment plans.
“The US has a key challenge for 2014 – to unleash the pent-up demand in the business sector,” Schomer said in the report. “Political uncertainty has stalled that process, but we still expect investment spending to accelerate by the middle of 2014. Congress looks set to flirt with chance once more, after doing little more than kicks the can down the road during its fiscal battle in October.”
“In Europe and Japan, the key challenge for politicians remains to rebalance economic policy.”
“In the Eurozone, austerity is likely to be eased as the fiscal situation improves, and monetary policy is expected to become more accommodative,” Schomer, said, predicting that the region’s GDP growth will stay at the 1.2 percent average recorded since recession ended in early 2013.”
“The main roadblock to faster growth is the on-going contraction in bank loans,” Schomer said. “European Central Bank rate cuts may not be enough to unclog the lending channel.”
In Japan, the government’s planned consumption tax hike early next year to reduce the country’s fiscal imbalance is likely to cut the growth rate by a half in 2014, and growth in coming years is likely to be dictated by the US Federal Reserve, rather than the Bank of Japan.
“We expect the eventual tightening of US monetary policy will trigger another round of export-boosting yen weakness,” Schomer said.
PineBridge Investments’ Chief Economist believes that China has successfully engineered a soft landing and GDP growth will stabilise at 7.5 percent in 2014.
“We do not believe growth will slow further from here,” Schomer said. “On the contrary, a pickup in global growth should boost Chinese exports, which stalled in the second half of 2013.”
Most of the region’s private companies remain family-owned and family-run, with some institutionalization and organizational systems constraining their ability to capture opportunities before others. Many business owners with promising prospects look to experienced institutional investors to act as agents of change, driving institutionalization and realizing growth opportunities.
Additionally, the region is benefiting as new leaders invest significantly in infrastructure as a first step towards achieving their goals for economic diversification. Finally, regional commonalities of culture, social values, language and business are creating opportunities for expansion. For example well-managed service businesses in Turkey have tremendous expansion potential into the Gulf Cooperation Council (GCC), while GCC-based energy and related service companies are well-positioned to tap the developing energy markets in North Africa, Turkey and Northern Iraq.
From a private equity perspective, growth investments in partnership with businesses benefiting from these regional trends appear promising. These include business services, social infrastructure and industrial and manufacturing companies.
Moreover, real estate offers real opportunities. Sectors benefiting from the GCC’s economic growth, including; logistics and warehousing, education, healthcare and retail offer attractive income yields. Furthermore, limited access to growth capital in the region is creating attractive conditions for sale-and-leaseback transactions.
Selling their properties and leasing them back over the long-term offers corporates a practical way of unlocking dormant capital that is invested in their operational real estate assets and channeling it back into their core business. Sale-leasebacks are gaining popularity among owner-occupiers in the GCC region as companies look to free up their capital towards high-return growth opportunities. Investing in existing buildings with high-quality tenants on long term leases appeals to a broad spectrum of real estate investors because it offers a favorable blend of low risk and stable long term yield. The key is to focus on sale and leasebacks with top-tier companies within industries that are supported by positive regional macroeconomic fundamentals.
“Global equity markets could see significant inflows as interest rates rise, companies increase long-term investments and M&A activity perks up,” according to the Investment Outlook.
Robin Thorn, Head of Equities at PineBridge Investments, sees particular pockets of opportunity in Emerging Europe, which could benefit from increased exports and investments.
“Looking forward to 2014, we would encourage investors to embrace areas that will benefit from a more broad-based global recovery,” Thorn said.
“The fact that US and European equities have ended up giving similar performance in 2013, following strong outperformance by US equities in the first half of the year, is a positive sign,” he added.
“It typically means that the world is healing when the US, considered the ‘safe haven,’ lags the more cyclical European market,” Thorn said. “We could be on track for a synchronized global growth environment that is not just dependent on the US economy as the engine.”
“This means not forgetting about emerging Europe as developed Europe finds its footing, seeking opportunities arising from the Chinese Dream and finding the beneficiaries of corporations extending their investment horizons. Even if the ‘great rotation’ from bonds to equities does not come to pass, we believe a subtle rotation is more than enough to keep equity markets celebrating as we move from the Chinese Zodiac year of the Snake into the year of the Horse.”
With the US Federal Reserve highly likely to begin to “taper” its bond-buying program in 2014, treasury yields are likely to rise, but with less volatility than in 2013, according to PineBridge Investments’ Investment Outlook.
“We believe the treasury market has largely priced in tapering, thanks to over-deterministic Fed communication,” Global Head of Credit and Fixed Income Steven Oh, said. “We expect the future trajectory of US long-term rates to resemble a staircase, with a period of discrete jumps – like we saw in May to August 2013 – followed by long periods of consolidation, similar to what we are currently experiencing.”
Oh said fixed income investment managers should continue to shift exposure toward credit spread rather than duration – whether it is via investment grade corporates, bank loans and high yield bonds, or emerging market corporate and sovereign debt.
“There is slight upward pressure on the intermediate part of the yield curve and anchored short-term rates, but political and global growth headwinds are dampening overall upward pressure,” Oh said. “While most credit spreads appear to be close to fair value, there is room for additional compression if we steer toward a more bullish part of the credit market cycle.”
PineBridge Investments believes private markets are poised to deliver strong returns and will experience significant liquidity in 2014, provided capital markets remain stable and modest global economic growth continues. Short-term threats include market reaction to the US Federal debt ceiling debate, scheduled for February, and the onset of Federal Reserve tapering of its bond-buying program and eventual shrinking of the Fed’s balance sheet.
Due to different forms of socioeconomic change in Europe, the Middle East and Asia, interesting opportunities have emerged – particularly for small and mid-market companies in Developed and Emerging Markets, as well as niches such as structured capital, growth capital, real estate and private credit.
PineBridge Investments believes that Mexican private assets will perform well in 2014, following favourable economic reform pursued by the government, which has already pushed up equity prices over the last 18 months. While still favouring Mexican listed equity as a relative outperformer, PineBridge Investments sees very attractive opportunities in private credit, equity and infrastructure.
Japan’s political-economic backdrop could drive a continued rally in equities, according to PineBridge Investments. The country has reached a corporate consensus to redistribute part of earnings gains from currency depreciation as higher wages, which should largely offset the impact of consumption tax rises in the spring of 2014.
At a time when the Bank of Japan plans to extend if not accelerate quantitative easing throughout 2014, “Abenomics is still a glass three quarters full,” the Investment Outlook report said.
With recession bottoming out, European banks still disinter-mediating themselves, and the European Central Bank needing to respond to very low inflation, the outlook should continue to improve for European credit, according to PineBridge Investments. However, given the current elevated euro, such positions should be hedged.