European QE will have knock-on effect for Gulf markets

The ECB programme is meant to revive a stagnant Euro-zone economy, which is in the throes of deflation.

The quantitative easing (QE) programme planned by the European Central Bank (ECB) will have some effect on Arabian Gulf equity markets, but the price of oil and an expected rise in US interest rates will play a bigger role, brokers said.

The ECB’s programme, which is similar to the QE programme that ended in the US last year, is meant to revive a stagnant euro-zone economy, which is in the throes of deflation.

“As we have previously seen with the Fed [US Federal Reserve] when they had done the same exercise, this part of the world should not be one of the key beneficiaries,” said Sebastien Henin, head of asset management at The National Investor in Abu Dhabi. “The fact is here we are too niche. Our weight in MSCI [EM Index] is low, only 1.5 per cent. We are more driven by what is happening in the oil market.”

The oil price dropped to near six-year lows last year on the back of oversupply in the global oil market, weaker demand in Europe and Asia and a strong dollar, roiling Gulf equity markets in the fourth quarter.

But the ECB’s QE programme could help to revive economic growth in the 19-member euro zone, leading to higher consumption of oil and potentially higher oil prices.

“This move will boost investors’ confidence and encourage investors to add more risk to their portfolios” said Tariq Qaqish, head of asset management at Al Mal Capital.

The US is expected to this year raise its target interest rate, which has stayed at a record low since December 2008, in a range of 0-0.25 per cent.

“It [ECB’s QE programme] should marginally support the bond prices in the GCC and potentially reduce slightly the equity risk premiums as well.

“We as a result expect a positive effect also on GCC equities,’’ said Jaap Meijer, the head of financial services research at the Dubai-based investment bank Arqaam Capital.

“But more importantly we think the effect of interest rate increases in the US is potentially more substantial than quantitative easing in the euro zone over time, and we expect the yield curve to dramatically flatten.”

The stabilisation of the equity markets and their high yields will attract European money to the region’s dollar denominated assets, said Mohammed Ali Yasin, the managing director at NBAD Securities.

“Our market will benefit because we have yields of 4 to 6 to 7 per cent, depending on which company you go to and also those assets are dollar-denominated, therefore giving investors a good hedge against currency movements like the ones we saw in the Swiss Franc last week,” said Mr Yasin.

Follow The National's Business section on Twitter