RIYADH: As the world faces significant geopolitical and economic unpredictability, Michael Bolliger, chief investment officer for emerging markets at UBS Global Wealth Management, told Arab News in an exclusive interview how the market responded to this uncertainty cocktail.
The war in Ukraine, according to him, has brought to light the high degree of differentiation among emerging markets. “Higher commodity prices are a challenge to importers like Turkey, Egypt and India, as their external balances worsen,” he said. “However, they are a boon to oil exporters from the Gulf region. This distinction is manifested in the recent divergence of sovereign bond spreads of the importers and exporters.”
Asked about the outlook for the Gulf Cooperation Council, he said this is an interesting point in time for the GCC and certainly for Saudi Arabia as well. “There are important things happening, specifically around Vision 2030. We see various projects now gaining shape and accelerating,” added Bolliger.
Volatile oil prices
Talking about the global context where energy prices are being supported by the global economy coming out of the pandemic, the UBS CIO said he sees the reopening trend accelerating. “By and large, the world has become a lot freer in terms of people’s movements, which means there’s a greater ability for consumers to spend and the service sector specifically to do well,” explained Bolliger.
That, of course, he said benefits the energy sector as well in combination with ongoing and probably growing restrictions on the supply side. 
Bolliger pointed out that people simply didn’t invest in oil facilities for quite a while now. “We saw already before the war in Ukraine that limited supply growth started to influence energy prices,” he said. “And then we had the situation in Ukraine which added another leg to this development, and energy prices saw another move higher.”
He underlined that this movement has become a significant tailwind for this year and probably even for the medium to longer term. “You look at the Saudi stock market and the region more broadly, and you see asset prices obviously starting to reflect the benign environment,” added Bolliger.
When asked about the volatility of oil prices, Bolliger said it’s fair to assume that at least for the next couple of quarters, “we will see higher oil prices than what was assumed in their forecast three or six months ago.”
He remarked that the reason for that evidence from other countries being affected by US sanctions suggests that it may take a long time for the sanctions on Russian oil to disappear.
With the release of strategic reserves in the US and elsewhere, Bolliger believes at some point they may try to fill these reserves again. “This also means that we will see a lesser impact on economic growth right now and hence less of an impact on the demand for energy for the next few quarters.”
While Bolliger expects energy prices to remain volatile — in terms of level, revenues and volumes that Saudi or the GCC can export — he sees these as positive developments locally.
Future outlook
Assessing the performance of financial markets in the world today in light of the pandemic, the volatile oil prices and the unfolding events in Ukraine, Bolliger said there’s a lot on the commodity space as far as Russia is concerned. “People have to deal with the interruptions due to sanctions and the risk of further sanctions. That initially triggered quite a bit of correction and volatility,” he explained.
However, Bolliger pointed out that markets and commodity prices have started to calm down a bit. “We see that, for example, when we look at the energy price developments, it is also related to the release of strategic reserves in the US and elsewhere, which has acted as a stabilizer more recently.”
Against that backdrop, he said people look back at the other market drivers and what they see is the US economy still doing quite well. “We still see relatively solid growth in Europe and elsewhere. China went through a difficult 2021 but will probably now also see brighter prospects for 2022,” explained Bolliger.
Despite all the terrible things happening in Ukraine, the UBS CIO said people realize that the world economy may still do relatively well in 2022, resulting in a rebound of risk assets.
Bolliger thinks that while one would like to focus on the developments in Ukraine, “we should not lose sight of all the other things happening elsewhere.”
HIGHLIGHTS
Michael Bolliger says the war in Ukraine has brought to light the high degree of differentiation among emerging markets.
With the release of strategic reserves in the US and elsewhere, Bolliger believes at some point they may try to fill these reserves again.
While Bolliger expects energy prices to remain volatile — in terms of level, revenues and volumes that Saudi Arabia or the GCC can export — he sees these as positive developments locally.
More to the point, he explained, what is top of mind is the monetary policy outlook with the Fed being obvious that they need to do a lot more to contain inflationary pressure.
“It’s worth remembering that historically whenever the Fed actually started to hike interest rates, the market typically reacted in quite a benign manner, at least for the next few quarters,” Bolliger opined.
Saudi Arabia in focus
With regard to Saudi Arabia, Bolliger said that he was impressed with the fact that despite all the challenges that the Kingdom faced due to the pandemic, it continued on its reform trajectory and its commitment to work toward Vision 2030 and diversify the economy.
“What’s more,” he added, “even during the height of the pandemic, Saudi Arabia did some fiscal tightening measures like the introduction of new taxes, etc.” While this is not a popular thing to do, Bolliger said, it shows that the government is very serious about its medium- to longer-term plans, which is quite encouraging.
Recalling his recent trip to Riyadh, Bolliger said he was impressed to see how much the city had changed. “It just shows you that there are a lot of things happening on the ground.”
With this tailwind and given the discipline to stick to the bigger plan, he said, Saudi appears well to achieve some of the goals outlined in its Vision 2030 at some point.
Despite many challenges, Bolliger added, the Kingdom also seems set to transform its economy away from fossil fuels to other revenue and income streams.
Investment opportunities
Asked about the latest investment opportunities in the region, particularly in Saudi Arabia, Bolliger shared that they like the fixed-income market. “We believe investors typically don’t fully appreciate the credit quality of various issuers in the region,” he added.
Also, on the equity side, he said, this year again looks quite promising for Saudi stocks on an index level as it was the best performing emerging market in 2021. “I think people are quite bullish. Increasingly, it’s worth remembering that Saudi Arabia has become one of the biggest markets in the MSCI Emerging Markets Index,” Bolliger said.
He said Saudi is currently number six in global emerging markets in market capitalization. “And the trend is growing,” he added.
Bolliger recalled a couple of years ago there were quite a few fund managers who said, “Well, I will simply ignore this market because it’s small, and I don’t quite understand it.” But he insisted this is changing now, and it’s actually changing quite rapidly.”
