Middle East Investors Having Trouble Finding Value

With all that is happening in the world – the U.S. election, the Brexit vote, various terrorist incidents, speculation about will she or won’t she raise rates at the Fed and other concerns – oil seems to have been pushed down the priority scale of market-influencing issues. The price of West Texas Intermediate has varied between the low and high $40s for months as investors have reacted to news about restrictive fracking legislation, Saudi Arabian production, demand in a slowing world economy and the liquidation of the huge crude inventory overhang. Given that oil has certainly not diminished as the world’s most critical commodity, I thought I would like to learn more about what is going on in the Middle East. So at the end of last month, I traveled to Abu Dhabi, Saudi Arabia, Qatar and Dubai to meet with Blackstone’s limited partners and others and probe into their thinking about energy and the geopolitical environment in the region.

Like investors everywhere, asset allocators in the Middle East are having a difficult time finding attractive opportunities for capital appreciation. They are apprehensive because the current business expansion, one of the longest on record, has continued for 87 months. On monetary policy, which they considered important, they are confused because they hear that the U.S. economy isn’t growing fast enough for the Fed to raise short-term interest rates (which they view as a positive), but are also hearing that rates have stayed too low for too long and raising them would put more money in retirees’ pockets and actually help the economy grow. They are worried that the spread of populism across Europe will cause a breakdown of the European Union and fear that the decision to leave by the United Kingdom is only the beginning. The anti-trade and anti-immigration policies of populism would not be good for Middle East business people or their investments.

I had an opportunity to address a Brexit concern in mid-September. United Nations Week was taking place in New York and, as expected, the traffic was materially worse than usual. I was invited to a reception for the new U.K. Prime Minister, Theresa May, and I debated about going because I knew it would be impossible to get there and I doubted that I would learn much, but I decided to brave it anyway. After a brief speech, she took a question from each of the people who lined up to engage her. I asked her whether the European countries were going to treat Britain like an “escaped prisoner” (Henry Kissinger’s phrase) and punish it for voting to leave or whether they would negotiate bi-lateral trade deals with a positive attitude. She answered, “Europe views me as a victim. I supported the ‘Remain’ vote. The populists took over the mind of the electorate and defeated us. Many European leaders feel like they are victims of populism also and sympathize with me. I think European leaders will have a constructive attitude toward trade negotiations with the U.K.” If she turns out to be right, U.K. and European stocks are a buy.

Middle Eastern investors are apprehensive about the U.S. presidential election. While most believe a victory by Donald Trump would bring increased uncertainty to the world economic outlook, some believe lower taxes might stimulate growth. The one issue that doesn’t bother them is terrorism. To be sure, a major building was blown up in Dubai on New Year’s Day, although whether terrorists were responsible is unclear. I visited only Sunni countries and their fear is Iran. They believe Iran is proceeding with its nuclear program in spite of the agreement signed in 2015 to cease weapons development. One thing that Israel and most Middle East countries agree with Donald Trump on is that the Iran deal was a bad decision. Last week at the Council on Foreign Relations in New York, Vice President Joe Biden defended it vigorously. While Iran is a major source of apprehension in the region, it is also a place where there is hope for the future. While the religious leaders maintain tight control, the restless growing young population wants the freedom and economic opportunity they see in the West. As a result, there is some optimism that the friction between Shiite Iran and Sunni countries will diminish, but admittedly this change is likely to occur over a long period of time.