Why the MENA Region Can Survive US/China Trade Disputes
There are tangible signs economies in the MENA region have reformed and evolved over the past decade, according to Franklin Templeton Global Sukuk and MENA Fixed Income’s Dino Kronfol, and Franklin Templeton Emerging Markets Equity’s Bassel Khatoun and Salah Shamma. They outline the opportunities they see in the year ahead.
In the Middle East and North Africa (MENA) region, we’ve seen signs that many of these economies have adjusted, reformed and evolved to tackle the headwinds that have come their way over the past decade or so. In recent months, new challenges have arisen.
As we move into a new decade, we’ve seen evidence of growth in a number of MENA economies, across both fixed income and equity markets.
A WORD ON OIL PRICES
Before the novel coronavirus outbreak, we thought an oil price range of US$60-80 per barrel with a commitment from OPEC+ would be sufficient to support the global economy. Now we are seeing a potential slowdown in global economic growth and a dip in demand for oil as the virus spreads. We will continue to monitor the next OPEC+ meeting in March and see if members make supply cuts.1 We expect global growth to bounce back in the long term, and see oil prices rebound from current levels of about US$50-55 per barrel back to the range we anticipated before the virus outbreak.
The world continues to focus on the potential market impact from ongoing US-China trade disputes. As most investors expected, US President Donald Trump recently signed a “phase one” trade deal with China which should likely cool off any further retaliatory action from either side—at least for now. While we continue to monitor global trade tensions, we think it’s unlikely the MENA region will feel a major impact from disputes between the United States, China and/or Europe.
MENA countries, for example, export a low number of non-oil goods to the United States and China, as seen in the chart below. MENA equities are also pegged to the US dollar, while GCC debt indexes exhibit a third of the volatility of the J.P. Morgan Emerging Markets Bond Index (EMBI),2 meaning that they are broadly lowly correlated to spikes in global tensions like trade wars, geopolitics or sudden oil price movements. And yet despite these favorable characteristics, we think MENA equities and fixed income asset classes continue to be underappreciated by investors.