Of princes, ministers, and businessman arrested on the orders of an anticorruption commission. Analyst of senior the Geopolitical Futures what if the crown prince was moving to boldly and to quickly. He is moving too quickly. That level of change in such a short euro of time, the risk of the question is what kind of resistance will be face . So far he has not seen any resistant, and the fact that he went ahead and arrested all these princes and businessmen, that suggests that he is unlikely to face any opposition. Doesnt he Score Positive points if he comes out against the russian as the head of the committee that is looking into case like this and making it clear that nobody is above the law . I am quoting directly from the statement that came from mccain over the weekend. We will fear no one, big or small. Yes. I mean, these are designed to curry favor with the public, a large segment of whom, 2 3 of the countrys population. Its designed for that. But the problem here is that for now this may be a very populist move, but in an authoritarian regime moving toward populism, it sets up expectations that it may not necessarily want to deliver on later down the road. So the question is, what route will this path unfold to, and will the current crown prince, soon to be king, run into problems down the road because he is jacking up expectations amongst the public . There is a view that the centralization of power is necessary to get the kind of reforms through that they are targeting and that has been welcomed by both to mistake in Foreign Investors. In terms of this list of powerful and influential people that have now been arrested, the current and former officials, we look at the minister of the economy, we are seeing some of the most influential princes that have been picked up. What happens to them . How does the story youve all from here evolve from here . They are faced with a dilemma. On one hand, if they do nothing, they are essentially going quietly into the night. If they do something and they put up resistance, then they risk creating a crisis inside the kingdom, and the story does not end well. They are in a bit of a conundrum here, and i suspect that the arrests are not permanent, this is not necessarily an absolute purge. I suspect that is the move to get them to negotiate and put their waste behind the crown prince as opposed to creating obstacles. I think they are geared toward that kind of outcome. Will the crown prince get that kind of outcome . That remains to be seen. We had a Ballistic Missile flyover riyadh. Its not something that happens every day, coming from yemen. How much more escalation will there be . Problem, how can the kingdom manage the domestic transformation, which is massive in terms of scale, and we have already discussed it is happening way too fast, and how can a deal with the challenges on the external front . You have to be coherent at home in order to effectively deal with the threat from the outside. This is going to be very, very tricky, but i suspect the king and his son would not have moved so rapidly on the domestic front if they did not feel they had a good chance to succeed. But then again, there are so many variables up in the air, we just dont know where this is headed in any definitive way. I also spoke to the elite he sayso manager and saudi arabia was in for some painful but necessary reforms. I asked him whether the pace of change now occurring was simply too rapid. Is it a move in the right direction or not . That is what will remain question. I would say we were concerned before about Economic Reforms going so fast, and we heard from reassuring messages recently. Thats what matters for us at this stage. But for every reform that has taken place today, what really matters is a move to the right direction. Some people may say it is moving so fast, but others were saying a year ago that things are not moving so fast. It is always going to have both sides of the story, but for us, its a move in the right direction. Positioning,s of what kind of sectors are you getting exposure to . Well, currently we are almost 30 allocated within our means, we like to think it is a companies doing really to good and other companies doing really bad. Reforms are coming, change is but the company and the reaction to these reforms is what dictates arour investment decisions. We can see Many Companies reacting, the tune has changed drastically, we are meeting with companies on a continuous basis since 2014, since the oil price collapsed, and we can sense that certain managements realize the change and others are still in denial. Sectors are companies that will manage that thread. What i dont understand is where the bullishness is coming from. Andeak to a lot of ceos, they tell me in many cases that it is not all glory, they are facing tough times. There will be political changes but in terms of the business environment, its not there, jobs are not taking in, nonoil gdp is not growing. Where if the optimism from the Inflection Point and the fruits of the pain of reform . It is not about optimism. Its about certain sectors who will not benefit as much like we would see in other sectors which will be effective at most at a later stage in the cycle. Ll start to expand at a faster pace in the future, probably 2018 or 2019. Theyre facing a lot of changes. We have seen a huge try by the government, and that will leave a lot of people out of the country as well. So probably the sector will be affected the most. On the other hand, a lot of positive reforms taking place, but again, when we talk about insurance or banks, it will be different. Reaction, we the have seen that in the result. Been very as there is no clear path for corporate earnings, and some companies are posting very strong results, like in the telecom sector. Maybe not at the speed we would like to see. Up next, oil on the boil. Crude declines sharply, but opec warns of the increasing threats from u. S. Shale. The have the full story next. This is bloomberg. Welcome back to the best of Bloomberg Markets middle east. Oil was on a tear, helped in part by the situation in saudi arabia, but opec warned that it may be a doubleedged sword, shalee what created production will grow considerably faster than expected. I got to speak to standard chartereds global chief economist, but first asks Tracy Alloway if this was a miracle but from opec. It certainly reads that way. This comes from their annual world oil outlook, affectionately known as the woo. Forthing is the forecast u. S. Shale production, opec wrapping them up. They expect shale output to soar to 7. 5 Million Barrels per day by 2021. That is 50 higher than the forecast opec made a year ago. The other thing is the language. The quote where they say, most strikingly, u. S. Shale Oil Production has exceeded previous growth expectations. You and i both know that is slightly different to what we normally see from opec, both in its official reports and from members themselves. Traditionally, a year or two ago, if you ask him about u. S. Shale, they would swat it away as not much of a competitor. I should say, if you review the report, opec is still trying to make the case that it is the major player in the oil market, but there certain seems to be a growing recognition that shale imposes something of a threat. Tracy, let me pick up here. Id imagine, it is becoming more of a head game for opec. It sort of undues the sacrifices. How much of a problem do you think this is going to be . Sure. This is exactly the question. Even though we have seen oil prices rampup, will we get back to the old dynamic where every time there is a rally in the price we see u. S. Production begin to ramp up in response . Already, based on the current oil price, which is about 57 per barrel for wti, were seeing talks that u. S. Shale producers are going to use that as an opportunity to hedge their future production at much higher prices and thereby rampup profits and potentially rampup future investment. If you look at the wti calendar for 2018, that is the benchmark against which these hedges are often set. It is currently 55 per barrel, the highest since february. A Good Opportunity for shale producers. But the of paying is whether the other thing is whether a couple case the opec exit strategy. Most of the market expects them to extend, but what happened at the end of next year when those cuts begin to be taken away . Are we then lets once again with u. S. Shale not only in a more profitable position, but to report, in a position where it poses a fundamental threat to opec . Tracy, great having you on the program, as always. Tracy alloway, life out of abu dhabi. Still with us, the global chief economist at standard chartered. Just to recap in terms of the direction of crude oil, its quite a rally for wti. How sustainable is that . How much further can i go . Sustainable, but i think we are close to where we need to be with oil prices. The last time i was here we had a very aggressive forecast. We are more or less where we will prices should be. Its an interesting market. I dont think it is sustainable for most producers and that is why we thought at 40 we were not sustainable. But if you move to 70 you are going to see increased production from unconventional producers. I think they are close to where we need to the. Oil prices around this level look to be closer. I guess the other side of that is what about inflation outlook . Everyone knows the one asset whose rapid change in the outlook affects not just things like breakevens all the way to Consumer Spending habits, it is a rapid change in the oil price. Hasnt moved up for not for you to make you change your math of the inflation outlook next year . No, it has moved up in line lineour forecasts, and in with our expectations. This will be something we expect into 2020, and different recalculations from our side. It is not on the level where it creates problems to the economy. In fact, low oil prices cause problems throughout the world. What we saw in 2017, for example, throughout the year, is that the increase in oil prices and Commodity Prices has given up some Pricing Power to asian exporters. Different implications that one would not have thought of in the beginning that were positive for the world economy. Where we are is a comfortable third place for the Global Economy to operate in. Your outlook generally speaking of Monetary Policy next the people have sort of latched on to this new narrative after the boe decision about a week back. Its the fed that raises rates and apart from that, they are on their own. And that would be very interesting for markets. It looks like the u. S. Is doing well. We know we want to increase Interest Rates and theres a possibility that the inflation unemployment relationship that has been lost could return. Theres a genuine risk that the fed could be the central bank that does more, and it is the main central bank that is six mobile conditions the most. Lets not forget there is Balance Sheet reduction by the fed, and there will likely be Balance Sheet reduction from the big European Central bank. Monetary policy would be the key to watch in 2018 and 2019. This is a heated debate about what it will do to the American Market space. Goldman sachs just put out a note that they will have another 10 to add. Is it too much money flowing into emerging markets, distorting valuations, creating risks . Developing markets across the world, the emerging markets story is positive. Look at global growth, doing well, but there is only one reason that grows higher than the global average, which is asia. Everybody else grows below, so the u. S. Is doing better, europe is doing better, but this is an asian driven world. Up next on the best delivered market middle east, is the picture really that rosie . We care from the head of research at msnbc. This is bloomberg. Welcome back to the blessed of Bloomberg Markets middle east. On sunday, we got pmi data for the uae, egypt, and saudi arabia, with figures rising from each nation. The head of research at the emirates mbd said behind the numbers, there were some slightly worrying signs. Although the headline numbers are showing a really strong growth in the volume indicators of the pmi, we are seeing in the rest of the surveys squeeze on margins for companies in the uae in particular. If we look at last month, 8 of firms surveyed they cut selling prices last month. That is a huge number, a record, and it certainly does point to margins being squeezed and working harder to get new sales and at the same time facing higher input costs. It is i think going to have an impact in terms of their ability to get employment because they are obviously not willing to spend more when their margins are under pressure, and really having to restructure a lot of the ways they operate and find new efficiencies. In terms of the headline pmi from the uae, do you see any evidence of is being driven by companies boosting inventory ahead of the vat coming in . Im not sure its the head of the vat, but we have seen some inventory accumulation, and that to some extent also reflects confidence for the coming season. Generally, firms have so they are more optimistic about demand over the next few months, and in anticipation of that, they are building a preproduction inventories, materials and components they would be using to manufacture. You could see this potentially building a before vat, but it is also possibly an indication they are expecting demand to remain strong. Its like a rorschach test. It is a fine line. In terms of the story other saudi arabia, the pmi coming out in line with the previous month. But i want to talk about the bigger story, which is the political story, and the political fallout. A series of arrests, arguably unprecedented, hitting both business and politics. How offguard and how surprised were you when you heard the news, and what does that mean for the way you look at the saudi story . I think everyone was surprised with the news overnight. I dont think anyone was expecting quite that kind of reshuffle and crackdown but certainly, if you look at how the economic story has played out over the last two months, we had that huge announcement of the construction of a new city a couple weeks ago, massive investment required by foreign companies, and what it is showing is that the new leadership is committed to modernizing the economy and addressing the issue of old reliance on oil. If youre going to impose such a you areructural change, going to challenge the businesses that are already enjoying the benefits of the system. I think what this signals is that the crown prince is strengthening his position that hopefully,llow him, to continue pushing forward the reforms that are needed and executing them in a way that gives the results he wants, and ultimately, that will be a good thing for the economy, but clearly there is risk around that process, and i think there will be a lot of noise. But at the end of the day, it looks like he is moving in the right direction to achieve what he wants to achieve. In terms of the Overall Economic growth rate, then, of the middle east, we have the imf releasing its outlook for the region last week. Growth in the gcc is expected to come in that. 5 . How do you feel about that estimate . Too high, too low . We think it is a little conservative. Our forecast is a little stronger. But when the headline number is misleading, a lot of it reflects the customer will production. Saudi arabia in particular, the biggest economy in the region, cut more than they agreed in november, which is really waiting on the headline gdp growth number. If you strip out the oil and look at the nonoil indicators, even the official gdp statistics, there is growth in the nonoil sectors. Not as fast as last years, but i do think it is something that will recover as we head into 2018. Next on the best of Bloomberg Markets middle east, the saudi shakeup. More analysis on the corruption crackdown that rattled political nerves and move markets. Thats ahead. This is bloomberg. Yousef [to the best of Bloomberg Markets middle east welcome back to the best of Bloomberg Markets middle east. Lets talk about the situation in saudi arabia. The government has only frozen accounts of individuals they suspect of wrongdoing. It includes one of the worlds richest men. Acrossrberated boardrooms and Financial Institutions in the region and around the world. I began by asking for more details on the arrests. We dont know much. We know they have been arrested. There is chatter that the ritz hotel has been set aside to hold these 49 people, and beyond that, not much has been announced. Not formally. The official statement having out is general saying this is phase one, and now we have had a ,tatement reassuring markets because we have had some companies tied to people that have been rumored to have been impacted by this. He is coming up to reassure people saying this is for individuals, not company counts. Yousef theyre going to be moving ahead with some trials. Had they set out a clear timeline . They have not. They have said this is the process, undergoing undergoing due process. They are saying this will go through the usual Legal Process in saudi arabia. Some might be released. It is not said they are all guilty. Yousef i want you to weigh in. You have observed the story over many years. Coming from the desert, investors are struggling to get their head around the rest of these highprofile princes and billionaires. Is, if anyoneion was in doubt that saudi is changing, because there was always a doubt, is saudi going to change . Is the plan going to be implemented . Are we going to see more of the same with just the rhetoric changing . I think this answers the question. Saudi is changing. In the short run, there will be volatility, uncertainty. Some decision paralysis from some individuals in saudi of law. It could impact negative it could impact markets negatively, but i think there is a longterm plan and they need to change the existing economic model. It will not sustain saudi into the future. They had no choice in changing the direction of the country. Yousef i just can back from you i just came back from riyadh. In terms of a Ballistic Missile over the skies, the rhetoric is even sharper than it has ever been before between iran and saudi arabia. We heard comments from the u. N. Ambassador rice from the u. S. , nikki haley. The lebanese Prime Minister has resigned. How fast will this escalate from here even further, given the region is on edge . That reinforces the idea there is something new in saudi arabia. Before things moved slowly, gradually. Change was begrudging. Now, it has gone from zero to hyperdrive. This is impacting their Foreign Policy as well. The rhetoric with iran has been sharp for some time. There are wars in yemen and other places, syria, that are ongoing. Mean,his escalation, i the missile was fired. With this escalation you sense that more may be coming quickly. We dont know for certain what. We have had a conversation say that the only option they have is to escalate proxy wars. Yousef you get a sense that there is a lot of anger there and the same thing goes for iran. The likelihood of an escalation , we artist level pointing to the escalation and proxy wars. Had pointing to the escalation of proxy wars. I think we should be expecting escalation. Geopolitics around the world are on edge. Also in north korea. The problem with geopolitics is it is difficult to factor them in. It is difficult for markets to predict that this will actually happen. What you see with geopolitics is that they gradually escalates, and then suddenly you wake up one day and have a completely different picture. We cannot underestimate the significance of geopolitics everywhere in the world, and we cannot ignore the fact that geopolitics deteriorating in the pressures and tensions in the region are on high. There are problems in syria, iraq. The relationship between saudi arabia and lebanon is also escalating. We are in an environment where politics are not positive. Yousef coming up on the best of Bloomberg Markets middle east. Building a beauty building a better future. This is bloomberg. Yousef welcome back to the best of Bloomberg Markets middle east. The First Real Estate Investment trust posted strong record of growth following the acquisition. 179 . Rofit jumped around i asked the ceo and deputy chairman how sustainable those figures are. Those are our current trends. This is very sustainable. This continues to grow. Of position is a testament future growth. This is because we bought good properties. Schools, one last year, one this year, that gives us a stronger boost in income. Yousef what is your stand on dividends . We are quite close to doing it. We announced already that we will soon increase our dividends. Tracy we have heard about the dividend passthroughs, but in terms of acquisitions, you mentioned in your statement you are pursuing opportunities in the current market environment. Give us an idea of what you might be looking at. We believe schools is a good component. It gives us longterm income. We like also to buy Office Buildings in the current market. We find good opportunities at the moment. What give us color and you are seeing in terms of rental income. A lot of people would assume, given the slowdown in oil income, some of the float the economy in this region, that rental income would be falling. Your results seem to be suggesting otherwise. Rental income in dubai is quite sustainable. We try to buy prime buildings and buildings that have depreciation. We improve our buildings. Very cautious about their cap accept the moment. Ir capex at the moment. Yousef investors have yet to be convinced with your story. ,our stock down 11. 4 this year underperforming the main market. The road ahead, i look at what is happening ahead, the construction and amount of supply coming on. Are you concerned or interests that that is going to pressure the market more . Last time we spoke you said it has bottomed out. Tracy good question. We still believe it is bottom down. We are not worried about supply in office and schools. Very few supply in new offices. It is mostly supply in residential markets. We are quite optimistic about the future. Tracy the structure has tended to come under pressure when we see Interest Rates rise. We are in a tightening cycle in the u. S. Now. That comes through here in the region there were two of the dollar peg. How much is that pressure feeding into your business and what we are seeing in terms of share price . They share price is more due to the Foreign Investors. Lately, you can see that on the chart. That is something to recover now. We believe the pressure will turn. We believe the share price is going to turn. Rates, it is going to replace our current bank with a fixed loan with fixed rates. Yousef it could be at least 300 million. Is that the correct figure . Could you give us a more precise number . The goal is to replace our current debt facility. Sukuk will be north of 350 million. We are still debating with a bank at the moment, so i can give you a final number, but the goal is to replace all our current debt facilities. Sentimentave a good from investors. A lot of them already came to us and said they are willing to convert existing debt into the sukuk. We optimistic. We are optimistic. Tracy who comes in to replace the qatari investors . Local institutions. Yousef coming up next on the best of Bloomberg Markets the best corps announced it bought two Office Buildings in new york this week. The ceo explained why there is an appetite for properties. Here are interview next. This is bloomberg. Yousef welcome back to the best of Bloomberg Markets middle east. A private equity firm is expanding its u. S. Real estate portfolio. The company this week announced the purchase of two Office Buildings in new york for 156 million. It has laid out plans to start the 750 million middle east Health Care Fund that will focus on investments in saudi arabia. Ceo and began by asking how much he had for property investments. The war chest is determined by appetite. From the region continue to favor real estate over asset class. If you think about the biggest markets for real estate globally, the United States stands out head and shoulders above the other markets. We have been one of the most prolific Foreign Investors in u. S. Real estate for the last decade. We are probably the number one nonsovereign investment invest fund in the region. Help me flesh out the appetite. It is what is it going to be bigger going forward, smaller . Growing appetite for Real Estate Investments, and we anticipate real estate itself being an engine of our growth ambitions. Yousef what about the story coming out of europe and the u. K. With brexit . Has it dented your appetite over there . In pockets, but there are also pockets of opportunity. We established a stronghold in europe, looking to make Real Estate Investments in europe, targeting u. K. , france, germany. And veryostbrexit recently we announced our first set of investments focusing on the logistics sister Logistics Sector in the u. K. Primarily ecommerce related businesses is growing, so we anticipate brexit not really impacting and just burgeoning demand. David this is david in hong kong. Forrecently announced plans the 750 million healthcare fund, which i believe part of which will be your mark for saudi arabia. Can you help desk can you tell us how much of it is for saudi arabia and how much else are you looking for for the fun . Mainly be for the gulf region, the gcc. Is by far the biggest market in the gcc. We anticipate at least half of the fund, if not i higher , being focused on saudi arabia. Is he market were there and have the government itself focus much more on the regulatory aspects of health care. All of the demand and supply factor is coming together your it being an underserved market, focusing on chronic diseases, rehab, postacute care, etc. , we think its an attractive market for health care investment. David you have been investment in you have been investing in tech. Where have you deployed that . Launched a tech fund. This is our fourth iteration. We had three Technology Focused once before. Before. Ed funds we have are reinvested in three companies we have are reinvested in three companies, all in europe, all focusing on mature the relatively still earlystage Technology Enabled businesses. Yousef there is barely any action on the stock. It is time is it time to go private or do will list in or dual list in another market . We are always looking at opportunities for us to do the right thing in terms of crystallizing shareholder value. That is absolutely true that our trade, veryt little. The ownership of the stock is no more than 350. If it makes sense further down the road to pursue either a cross listing elsewhere, we would look at that. We had a cross listing in the past. Yousef has anything changed on your view on the saudi story . A lot of investors i have been speaking to are struggling to digest all of this. Has anything shifted from where you are sitting . We have the advantage of being longterm investors. As we look at the saudi story from a longterm lens, we continue to find the region attractive, not just from the perspective of being a provider of Investment Opportunities in the region, but also investing region,gion, but particularly saudi arabia. For the bests it of Bloomberg Markets middle east. We have a busy week. The right here for the start of the trading week in the gulf. Hat is sunday morning im yousef gamal eldin. Join me then. This is bloomberg. Jonathan from new york city, i am Jonathan Ferro with 30 minutes dedicated to fixed income. This is bloomberg real yield. Jonathan coming up, republicans take another step towards cutting taxes. Corporations may have to wait until 2019 for 20 . Cracks appear in credit. Bonds fall the most since august. Is there a message in the treasury market . The yield curve is in the flattest level in a decade. We begin with the big issue, junkbond pain
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