The United Arab Emirates is reportedly considering relaxing tax residency rules to forestall the departure of investors and expatriates amid the war in the Middle East. It looks like heightened risk will continue to justify diversifying out of the Middle East, even if the US and Iran succeed in striking a deal to end the conflict.
Although there has always been talk about the region’s perennial instability, there was little sign of any such risk until Israel and the US launched the war against Iran in late February. Diversification at present makes excellent sense. Spreading risk and exposure is the safest course.
In an era where safe harbours and safe havens can turn upside down overnight, investors should be careful. Switzerland is attracting much of the Middle East money, but the country also saw its second largest bank collapse ignominiously, largely because of poor regulatory oversight. This presents a risk that investors should take into account.
The UK might also appear to be a safe and friendly investment destination. Yet, the UK succeeded in passing Brexit, which shrank its economy by some 6%–8% versus its probable size if it had stayed in the European Union. Can foreign investors trust the prudential policies of such a jurisdiction?
And what happens if the populist, nativist parties doing so well in UK and French opinion polls take power and start blocking foreign capital and entrants? And suppose President Donald Trump’s administration makes good on his bluster about Greenland and starts a war against Europe?
Calculations about the relative attractions of European financial centres might then shift radically overnight.
Meanwhile, US Treasury bonds, historically a safe haven, are looking less attractive amid concerns over deficit levels. It’s easy to draw a direct correlation between aggressive US policy which drove up military spending, public debt levels and inflation, and the broader macroeconomic imprudence which is fuelling a retreat from Treasuries.
In March, Iran was directly threatening buyers of US sovereign bonds as targets for funding the war effort. No matter how seriously or otherwise such threats are, they are just one more indicator of the risk premium stemming from current US policies.
Only some normalisation of political affairs can ensure a return of stability and certainty in the investment landscape. Investors and wealth owners who normally recuse themselves from such matters might consider taking them more seriously – out of pure self-interest if nothing else.
