“DUBAI JITTER ACROSS COUNTRIES AND INVESTMENT AVEVNUES –What, Why, How and What’s Next???”
Collateral Damage across countries with all investment avenues Oil, gold, currencies (except USD due to flight to safety), metals, equities, REITs etc
- Global markets hit by fear about Dubai crisis
- Oil falls below US$ 74 amid Dubai debt default fears
- Dubai fears hammers Asian Banks and builders
- YEN surges to 14 year high against US$
- A catalyst for market pricing: Something had to come; some trigger had to come to pull the market down, and it came but in my opinion this is not a beginning of a crisis, but a kind of after adjusted effect to the crisis which was there before March 2009.
- Basically in my opinion markets across countries and investment avenues has started to feel uncomfortable to this huge liquidity which has made its ways to all asset classes across all emerging markets.
- Now is the time when the investors will start looking at fundamentals, which in my opinion will push the market higher
- One thing this crisis has further ensured that all the debate going on about withdrawing stimulus (mainly in emerging markets will take a pause for not, pushing equities even higher)
- In my opinion, going forward (may be beginning of next year), INFLATION remains the biggest risk to our Indian market, and I firmly believe ‘INFLATION’ has the ability to kill any bull market rally in equities (which currently is undergoing). Inflation is a dangerous word and with the ease Central Bank of India induced liquidity (in all forms i.e., Fiscal or Monetary) following world economic crisis, am sure the pace of withdrawing these will not be similar to the face at which these were induced, but still with the kind of expectation about INFLATION, market participants are having, I feel this will prove to be a dampener in equity market rally going forward (not now).
What happened?
On Wednesday, 25 November, the government of Dubai said that its investment holding company, Dubai World, which owns a vast portfolio of businesses worldwide, is being “restructured” with immediate effect. The objective of the restructuring is to “address financial obligations” and “ensure the continuity” of the company’s operations. The government also announced that it will ask all creditors of Dubai World to agree to a debt “standstill” during the restructuring and to extend maturities to “at least 30 May.” The announcement is not a default yet because payment is only due on 14 December 2009 of a bond held by one of Dubai World’s subsidiaries (see below). But, the announcement has already led to a rise in CDS spreads and resulted in multiple-notch downgrades overnight of several Dubai-based entities by S&P’s and Moody’s. (Source – UBS)
Markets to become more global (closely following each other)
My conviction over no countries being de-coupled (barring USA, which provides the
direction to world markets rather than following them) in today’s world gets stronger following this DUBAI CRISIS. And this leaves emerging markets in more of weaker spot. Every time debate grows over emerging markets leading the global markets out of the global economic/financial meltdown, some events arises, which takes a toll on this debate.
Though INDIA & CHINA is to a larger extent insulated from these events, but this globalized world does not leave any one and this is evident from the financial markets crash over the last two days i.e., Chinese main index Shanghai Composite down over 6% and India’s NIFTY down better than 3%.
The Potential Risk (Commercial RE) BUT am confident that there is nothing material in it…
After the financial crisis following CDS bubble in housing market and then subsequent downturn in all parts of economy, many have been raising fear since last few months that though housing market might have bottomed out in US, employment beginning to stabilize (as reflected through jobless claims – a more leading indicator), decent reporting by retail companies, a revival in technology sector with tech companies leading this revival, increased M&A activities etc., one area which market participant feel is still not out of woods is “COMMERCIAL REAL ESTATE”, and the next downturn will be led by a bust in commercial market. Though I feel (am not an expert on commercial real estate either in US, Europe, Middle East or emerging markets), if any bust kind of scenario had to happen, which could have a ripple effect across markets and investment avenues for a longer period of time, it would have happened during Oct’08 – Mar-09 (the worst time for economies, companies, financial markets across globe), when things were just not UGLY but turned UGLIEST. My view is more based on the PSYCHOLOGICAL aspect because of the fact that things were just too bad during those six months, when liquidity was not there, people were trying to find a faulty point out of any good news coming to markets. I just do not think that things can worsen any where closer to the levels prevailing during those times.
Markets finding optimism within Dubai pessimism
October 2009 – March 2010 (the worst ever period for all investment avenues, countries, corporate world around the globe) is over, and during these period, thing were just not ugly but turn ugliest where everyone tried to first find the bad news out of any good news, which came during these period.
Now things have drastically turned and “OPTIMISM” is the word which has taken the centre-stage, and now everyone is trying to find good stuff out of this bad news, which is:
- This amount of total Dubai debt component is just miniscule (from a broader perspective)
- This debt exposure are scattered across banks with European banks leading the pack, so there is no chance of any major financial institution going bust due to this crisis.
- Abu Dabhi will come to Dubai rescue as it has done a number of times in the past, though this time around Abu Dabhi is scouting for a hard bargain and one in my opinion this time it will just not be routine rescue but a lot of collateral will be exchanged for this rescue.
Going Forward…
I believe markets would forget this story in a day or two and this story will again be in focus around 14th December 2009, when a US$ 3.5 billion payout is due from NAKHEEL. Now is the time, in which I believe that no country or major financial institution (TOO BIG TO FAIL, though the debate on too big to fail will continue) is going to go bust, and even if there are symptoms of these, a larger concentrated and coordinated move will be taken by respective countries. This belief stems from my confidence that no country and political party would just want to spoil the credibility (due to PESSIMISM turning in OPTIMISM since the crisis occurred) they have been have to gather. And they know that any event of such kind could well have a catastrophic effect across financial markets and the credibility or the optimism which was built over last 1 year would not even take seconds/hours to fade away.
I remain confident that Markets (EQUITIES, OIL, COMMODITIES, and GOLD) would be higher than today’s level by the time December is over and we start New Year on the back of starting of capital expenditure cycle by corporate world around the globe. As inventories goes down, new capacity additions takes place, employment number starts looking better, retail consumptions returns to normalcy, all these will support the financial market around the globe.
Though the same cannot hold true for USD, which in my opinion will continue its slide but the slide would be drastic against other major currencies i.e., POUND, EURO, YEN etc. due to the similar deficit situation prevailing in European Zone, Japan as it is in USA. One thing I am absolutely confident about the DOLLAR will depreciate drastically against CHINESE YUAN (if china allows its currency to be re-valued) due to not so bad fiscal imbalance in China. In Indian context, Indian Rupee might appreciate but not by a large magnitude due to larger fiscal imbalances in INDIA (in comparison to CHINA).
Thanking You, Personal Regards,
Vinit Tulsyan
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Markets drive my passions, from across capital markets in India and from around the globe. I am a dilligent student of the markets. I am continuously in the flow - with global market movements, global macro data flows & developments. Networking & markets are an ongoing way of life.I by reading, listening, watching, observing markets & economy all around the globe, try to co-relate and estimate direction for our Indian Economy and Market. 
awesome. gud for me to work out for my placement’s group discussions. thanks