Weak us dollar -- What it Means to you.
Ten years ago the world was a very different place and life here in the Middle East presented residents with a strong investment picture. Growth in the economy was looking positive, the construction boom was under way, and the USD was strong.
Like all Gulf currencies with the exception of Kuwait, the UAE dirham has been pegged to the dollar since 1997, and so its fortunes are closely tied to developments in the US, subsequently today we face a very different world.
Most UAE residents are foreign and their principal objective in coming to the UAE is to save in their respective currencies. Having the dirham pegged to the dollar ensures that their savings are essentially in the world's reserve currency, so offering the stability that they have a base to compare the cost of something here to the same product in another country. It should also mean that even with the current economic issues that are going on, as long as you are spending dollars then the effective value should be the same.
Similarly, international investors are interested in a stable exchange rate as well as a stable inflation rate. You want a reasonable exchange rate when you change your UAE dirham back into your home currency as well as knowing the money you receive will buy the same value of items that it has in the past.
To understand the effects of inflation, we looked at the Bank of England website, and their inflation calculator. This shows that in the past 30 years inflation in the UK has averaged 6.3 per cent per annum. In monetary terms, this means that if you had Au1 in 1971, you would now need Au11.02 to have the same equivalent value of money. From the US Treasury website the numbers show that $1 in 1971 is equivalent to $5.58 now. The effect of inflation on savers and investors is that they lose purchasing power. Whether you've hidden your money under your mattress or whether it's sitting in the safest bank in the world, it is becoming less valuable with the passage of time.
The major effect of inflation is that a nation's nominal currency loses value. That is, it takes more dollars, or pounds sterling, or euros, or yen, or Swiss francs, to buy the same quantity of goods.
The effect of any changes in value of the US dollar does not affect us while we in the UAE however if we want to convert our currency and the dollar has weakened, then it will cost more to buy the same amount of the foreign currency. The UAE economy has shown signs of positive growth buoyed by higher oil prices, tourism, etc, but the weak US dollar has a bearing on this. If the goods purchased are priced in euro, yuan or another strong currency then that will have a negative effect on the economy as more funds are needed to make that purchase.
However the higher oil price has softened this effect by generating more dollars, offsetting the weakening dollar, and due to this, people visiting from the Euro zone or other areas with strong currencies find that their money goes further, thus making the UAE an even more attractive destination.
MITIGATING THE DAMAGE
By leaving the money in the bank we earn very little profit, but we are at the mercy of the perception of the US dollar by the international markets. So, as the purchasing power of our GCC currencies continues to depreciate we need to look at the options to prevent the further reduction in our savings. A general rule to protect savings is to buy real assets rather than leaving the money in the bank. 'Real assets' are typically:
1. Stocks in companies that will benefit from the growth in Asia: Investment - both foreign and domestic - makes up about 65 per cent of China's gross domestic product. Increasing consumption and greater industrialisation along with favourable demographics, which increase strong economic growth, all present significant long- term opportunities for investors who understand the region.
2. Alternative Investments that are uncorrelated to general stock market performance such as: Luxury Brands, with the increase in aspirational living in emerging markets, consumer spending habits of their middle class western counterparts will see global brands (luxury and chains brands) benefiting in the longer term trends. Health, as fitness and health becomes a priority in day-to- day life, developed markets like the USA, are seeing sales of organic food increasing from $4bn to $16bn over 10 years. And finally, Pharmaceuticals, by 2020, it is estimated that half of Japan's population will be over 65 (Source: United Nations Population Division). Given this change, investing in pharmaceutical companies or support systems for this demographic will benefit in the long term.
3. Property in emerging market: We'd suggest looking at materialising markets to see the benefit from investing.
Obviously there are number of fundamental factors to examine, such as the economy, political stability, and the legal system. A favourable exchange rate, tax structure, and financing are other key factors to consider. Historical yield growth, capital growth, local services in an area, and transport links are all additional factors to keep in mind.
Craig Holding is Associate Director of Acuma Wealth Management, James Thomas is Regional Director. www.acuma.ae
2011 CPI Financial. All rights reserved. 2011 CPI Financial. All rights reserved.
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