The Landscape
– We maintain our constructive approach both on global economy and the broader financial market environment for second half of 2024: our base case remains one of growth resilience and moderate inflation. While tail risks of either stagflation or a temporary growth scare over the next 6-12 months can’t be easily dismissed, we believe that – should unemployment show signs of rising as corporate margins compress and consumer spending falters – the Federal Reserve would not hesitate to take action even if inflation doesn’t fall as fast.
– Europe and China have shown signs of stabilization and possible turnaround. Market confidence in a continued recovery should provide support to equity multiples even through sharp but short-lived sell-off episodes. A nascent trend toward global growth plays outside of the US has already been visible in equity markets since late March.
– While we expect modest returns from here until after the US election in early November, we suggest that an increase in public equities exposure should be considered in case of markets’ weakness over the coming months.
Regional Outlook
Equities
– We have increased our allocation to KSA and UAE in line with our strong conviction. We have trimmed down our allocation to Qatar.
– We have added to Kuwait following the recent political developments which could improve market sentiment and may result in faster implementation of projects and reforms.
Fixed Income
– Activity in the MENA primary market remained robust, led by the UAE. Despite the suspension of Parliament, Kuwait’s sovereign credit remained unaffected.
– Liquidity in the Sukuk market markedly improved in Q2, following large issuances in Saudi Arabia. We maintain an agnostic approach and remain opportunistic.
The View
– To manage risks, an investment portfolio should be very accurately diversified across different asset classes – globally and regionally – as well as across public/liquid and private/illiquid markets.
– Liquid investments should always comprise a prevailing component of your portfolio – regardless of what are your desired outcomes (income, growth).
Analysis
– Raising capital for private market assets proved challenging, but AuMs have continued to grow. The share of Alternatives in the total universe is stable at 14.9%.
– In Real estate, capital raised fell 41% y-o-y and returns declined due to persistent inflation and rising interest rates. Buyers have the upper hand in negotiations: yields have not been so appealing in decades.
– Capital raising in Private credit has faced challenges from public markets. This may prove only a temporary occurrence: despite persistently high borrowing rates, demand from lenders for private credit underwriting appears healthy, with decent growth in new requests.
– The environment for Private Equity remains mixed: newer vintages with deals completed with lower leverage and valuations should in fact benefit from resilient growth. Secondary buyouts have seen a rebound in their share of exits against a backdrop of falling total value and deals volume. There is potential for a high-deployment year.
– Private Infrastructure fundraising fell significantly, and deal-making activity has been declining in 2023, but both are expected to turn around soon, with plans to increase commitments by more than USD 600 bln through 2027.
– Hedge Funds AuMs reached a milestone on the back of strong performance and investor inflows. Against a backdrop of expensive valuations in certain areas of the market, Multi-Strategy/Multi-Manager funds are to be preferred within an investor’s well diversified portfolio.
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