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Ammon News - Gulf News - There will be no dramatic changes to UAE and Gulf markets in response to the US Federal Reserve announcement that it will start tapering next month as their positive drive is largely being driven by their own economies.

A taper of some degree was expected in first quarter 2014 and so Gulf markets, who are already performing well, will be largely unaffected as the US Fed moves to cut monthly bond purchases to $75 billion from $85 billion. The UAE indices climbed 1.10 per cent on Thursday amid an ongoing uptrend post Expo 2020 win.

The move by the Fed is the first step in unwinding the unprecedented stimulus package put in place to rescue the US economy from the worst recession in seven decades.

In another welcome surprise, the Fed left interest rates at near zero. It has previously said interest rates will stay low “at least as long as” unemployment is higher than 6.5 per cent and the inflation outlook is not higher than 2.5 per cent.

Last month the US jobless rate fell to 7 per cent, a five-year low, as employers added more than 200,000 jobs.

Mohammad Yasin, Managing Director at National Bank of Abu Dhabi Securities, told Gulf News the trimming of the stimulus package will have more of an emotional effect than fundamental. “Provided that we do not have any drastic crashes in the US in the next 6 to 12 months, what will be driving interest will be the local factors” he said.

Now that the uncertainty over the outcome of the Fed’s meeting has passed, focus will shift to fourth quarter earnings.

Vijay Harpalani, Asset Fund Manager at Al Mal Capital, told Gulf News in an emailed statement that if earnings live up to expectations then the positive momentum will likely continue in the short-term, “albeit at a much softer pace than seen in the recent past.”

The flow of foreign money is expected to slow in coming weeks because of the holiday season and not the tapering, according to Yasin who says that local liquidity will keep the market moving in a positive direction.

Investors, however, will keep a close eye on the emerging markets, which took a hit between June and September after the Fed first suggested in May it could trim the stimulus package.

Emerging economies have been the major recipients of foreign institutional money because of the low interest rates but this money is now likely to flow back into developed markets, Harpalani stated.

This is because emerging economies have high budget deficits, relatively low forex reserves, and because higher government debt is highly susceptible to the outflows.

But the Gulf Cooperation Council (GCC) countries are relatively better placed than other emerging markets “given their high budget surpluses, currency peg and relatively modest government debt,” Harpalani stated.

This is most relevant to Saudi Arabia where foreign investor participation is relatively low and the market is predominantly driven by retail investors.

Over the medium term ,Firas Al Zghaibi, Financial Markets Strategist in Sales, Brokerage & Business Development at Menacorp, told Gulf News in an emailed statement that if the stimulus is cut by 50 per cent or higher, or scraped altogether, there will definitely be a negative effect on the financial markets.

“We have to note that the global markets are currently in overbought territory, which significantly heightens risk,” he stated.