Note From the CEO

Coming in to 2022 we knew that the global economy was most likely headed for a very rough ride. Geopolitical tensions were driving inflation amid record debt levels and a succession of anticipated Fed rate hikes. Fast forward six months and we are seeing these predictions unfold into reality. In May the Fed raised its rates by a half-percentage point (the highest increase in 22 years), oil prices have soared, inflation is hitting 40-year highs, and the war between Russia and the Ukraine is exacerbating the pandemic-induced supply chain disruptions that were already wreaking havoc on the global economy before the year began.

All of this is taking place within a backdrop of negative market sentiment, the looming threat of a Bear Market, and open acknowledgment that globalization is essentially over. There’s no doubt that the entire world appears to be in a state of confusion and the markets have not reacted well to the uncertainty.

These global economic headwinds have had a mixed impact on GCC countries. While the higher crude prices are bringing in significantly higher revenues for the oil exporting countries than previously budgeted, the imported inflation is real and needs to be managed well to avoid an unnecessary strain on the livelihood of our citizens.

Governments can use the higher windfall from oil revenues to boost spending, reduce debt and accelerate the achievement of long-term strategic objectives, but it is equally important to maintain the pace of reforms to diversify economies away from oil. There’s no guarantee that oil prices will remain inflated for the long-term with some analysts posing the valid question of how long it will take before economic activity in the US and Europe starts to slow down and eventually contract. Many predict that it is only a matter of time until we see demand for oil drop in response to inflationary pressure. While a few others believe that the eventual easing of lockdowns in China will lead to a surge in oil demand. The reality of the matter is that despite recent gains, oil prices will remain volatile as the outlook for demand remains uncertain.

As we make our way through the uncharted territory of record high inflation in the coming months, governments face the challenge of having to balance between the execution of reforms such as VAT, corporate taxes, and lowering subsidies versus finding ways to cushion the impact of higher inflation on their economies.

Bahrain has managed its inflation well at 3% despite raising VAT from 5% to 10% and the country has fared better than most GCC economies over the past 3 months. Overall, the region is in a relatively favorable position regarding prices and GCC equity capital markets have outperformed global and emerging market equities. While we will continue to experience volatility along with the rest of the world, there are sectors and companies that will clearly benefit from the relatively favorable macro picture, such as banks, aviation, and other hospitality-related sectors.

The age-old saying in commodity markets is that ‘The most effective remedy for high prices is high prices.’ The premise is that when prices go up manufacturers will want to produce and sell more to maximize profits which will eventually lead to higher supply, lower demand and therefore a reduction in prices. This certainty in the eventual normalization in commodity prices from tapering demand and improved supply-chain still holds true.

GCC governments currently have two paths that they can go down. They can either use the windfall gain from elevated crude prices to develop the private sector and decrease their revenue dependence on oil, or they can dole out additional subsidies to their citizens to minimize the inflationary pressure on households. The choice they make will determine how they wish to set their economic path going forward.

In respect of SICO’s near future, we remain focused on providing the best outcome in such an environment to our clients, while creating new investment solutions to help them navigate through all possible scenarios.


Najla M. Al Shirawi

Chief Executive Officer