By Walid Mansour
The second Trump era has escalated uncertainty in financial markets, leading to a slight downturn in U.S. stocks and a 30% rise in the VIX index—Wall Street’s fear and greed gauge—since his inauguration.
A recent report reveals that Gulf investors, who hold excessive positions in U.S. assets, face severe macroeconomic risks as the U.S. economy heads toward stagflation and a potential decline in the value of the dollar.
Shift to Asian Markets
According to the EGBI report, diversifying into Asian stocks could mitigate portfolio losses, especially since the greatest macro risks for Gulf investors under Trump’s second term stem from his “Drill, Baby, Drill” policy. This policy grants him broad powers to accelerate fossil fuel and shale oil production. Additionally, his determination to derail a Ukraine peace deal with Putin could ease sanctions on the Kremlin, further impacting global markets.
This policy shift has contributed to Brent crude oil prices dropping from $82 per barrel in mid-January to $72 per barrel. This 12% decline over six weeks is detrimental to the fiscal balance of Gulf nations, whose breakeven oil prices range between $20 and $35 above current levels.
If Brent crude falls to $60 per barrel—or even below $50 per barrel—due to an influx of Russian oil and gas post-sanctions, Gulf stock valuations could shrink significantly.
Dollar Weakness and Inflation Concerns
The U.S. dollar has declined by 3% from its peak, as 10-year Treasury yields fell from 4.8% on January 13 to 4.22% amid slower economic growth in Q1, which dropped to 1%.
Consumer confidence in the U.S. fell by seven points last month, while inflation exceeded 3% in Treasury inflation-protected securities (TIPS). The report argues that there was no monetary justification for the Federal Reserve, under Jerome Powell, to cut interest rates in December and that rate cuts in 2025 remain unlikely, as inflation remains well above the Fed’s 2% target.
Political and Economic Turmoil
Elon Musk and the Department of Government Efficiency, under Trump’s administration, have ensured that U.S. unemployment will rise above 4% this spring and summer, as entire agencies—such as USAID—are arbitrarily shut down, leaving tens of thousands of federal workers unemployed.
Meanwhile, the planned $1 trillion in government spending cuts have shattered consumer and business confidence, weakened local economies, and disrupted state budgets. This puts the Federal Reserve on a collision course with Trump’s White House, as the president pressures the Fed’s Federal Open Market Committee (FOMC) to cut interest rates.
With the U.S. economy sinking into stagflation and a looming power struggle between the supposedly independent Fed and Trump, the report warns that “King Dollar” may be dethroned.
Wealth Protection and Asian Alternatives
Given their dependence on the dollar, Gulf investors must protect their wealth by accumulating non-dollar assets. Emerging Asian markets present the most attractive alternative for GCC investors seeking to escape risks associated with the dollar, oil prices, geopolitical instability, and Trump’s second term.
For the past 12 years, Japan’s central bank has kept interest rates near zero, even as the yen depreciated from ¥76 per $1 in 2012 to ¥151 per $1. However, rising inflation and wages in Japan now force the Bank of Japan to raise interest rates, which could lead to a global market downturn similar to August’s carry trade collapse—on a larger scale.
Credit Crunch and Recession Risks
Wall Street investors recognize that Japanese institutions will need to liquidate nearly $1 trillion in global bonds and stocks to repatriate capital and stabilize Japan’s bond market. As a result, the yen may strengthen to ¥120 per $1, pushing down U.S. Treasury prices and Western stock markets, while triggering real estate downturns in dollar-pegged economies.
The report stresses that Gulf investors must hedge against these risks, as they could lead to a credit crunch and recession—especially with oil price volatility—while Gulf currencies remain pegged to the dollar, potentially straining stock markets and real estate sectors in the region.
