Gulf markets to outperform Asia in drop caused by Fed

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Gulf markets are likely to fall on Thursday after a sharp drop by Asian shares in response to the U.S. Federal Reserve’s intention to end its radical monetary stimulus.

However, the Gulf is expected to continue outperforming most frontier and emerging markets because it is seen as partially shielded from the global volatility by currency pegs, high oil prices and the fact it lagged markets elsewhere in the world during their bull run in past years.

MSCI’s broadest index of Asian stocks outside Japan is down 3.5 percent on Thursday. But the Gulf has been comfortably outperforming that index in recent weeks; Asia has dropped 7.9 percent so far this month, compared to 1.1 percent gains for Dubai and Qatar.

Fed Chairman Ben Bernanke said on Wednesday that the U.S. economy was expanding strongly enough for the central bank to begin slowing the pace of its bond-buying stimulus later this year, and he signaled an end to the program by the middle of 2014.

“The U.S. was playing with a nuclear bomb and now they have to exit smoothly because we’ve seen the economy get better,” says Sebastien Henin, portfolio manager at The National Investor.

In Egypt, a weakening pound may pressure already-gloomy investor sentiment ahead of June 30, President Mohamed Mursi's one-year anniversary in office, which the opposition will mark with street demonstrations.

The Egyptian pound weakened to below 7.00 to the dollar on the official market for the first time on Wednesday, and analysts expect further drops as political tensions continue.

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