These are what the Chinese have been said to prophecy as interesting times, which is approximately to say a period of uncommon uncertainty and discomfort, particularly in terms of assessing the reliability of economic recovery.
Stock market investors around the world have become used to separating the reality of unconvincing business trends from the no less meaningful reality of booming financial markets, even if returns have to be cashed in to become truly tangible.
In the Gulf, participants have additionally experienced the distinct nature of regional pickup. Whether the exceptional performance of equities and real estate in the region can be sustained is a matter of weighing precedent against fundamentals.
For a protracted period, volatilities in key instruments have diminished at elevated levels, to the point of underpinning both complacency and nervousness. A certain trepidation anticipates the latest, coded pronouncements from the leading policy authorities, which happen to be the central banks of the most advanced economies, given the lack of room for manoeuvre in government budgeting and debt management, and the freedom to print (free) money rather than to borrow it.
Equally, at time of writing, the markets feel a certain, constant succour from the overwhelming systemic need to keep them afloat, along with banking sectors rebuilding their balance sheets and profitability.
If there is a red flag flying, signalling a dangerous unsustainability about this modus operandi, then it’s one which seems to be extenuating to a point.
That means, as charts increasingly tend to suggest, that there may be a breakout in the offing, which analysts rationalise should be to the downside. At the same time, the absence of viable, yield-generating alternatives prompts some observers to believe stocks will keep running onward.
Tension is palpable as the autumn season approaches, traditionally the time when in cooling climes a post-vacation beckoning of strategic reappraisal focuses minds on whether the numbers and risks associated with existing portfolios really stack up.
Severe shakeout
With the extraordinary circumstances of the past few years, and now the geopolitical flashpoints that may easily dent confidence, the scope for a severe shakeout in the markets is all too apparent. It only takes one triggering event to breach the shaky wall of sentiment and unleash a tide of damaging market reversal.
The regional perspective carries another juxtaposition worth reviewing, namely the balance of effects created by an ascendant US dollar (and matching Gulf currencies) on the one hand and the easing tendency of oil prices on the other. It has been reported, for instance, that Saudi Arabian crude exports have been discounted, in reflection of the sluggish world economy and burgeoning US production, but also the growing share filled by other Mena producers such as Iraq and Iran.
The dollar’s rise was well foreshadowed this summer, and seems soundly-based, rooted both in the US’s improving economic condition and comparatively versus other blocs. As previously mentioned, pure supply and demand go a long way in providing explanation, referring to the behaviour of central banks.
As a note from Emirates NBD put it last week, the chances are of “divergent monetary policies being maintained for a long time to come, underpinning the greenback at the euro and yen’s expense”. Although bound to gain to some degree across the board from that simple phenomenon, in fact the dollar is not gaining so noticeably against emerging market currencies.
As for the dollar-linked exchange rates of the Gulf, a stronger dollar evidently boosts their international purchasing power, while translating into a higher cost of energy imports to be faced by non-dollar countries. Financial investments in the GCC will appear attractive as dollar proxies, besides offering diversification. Meanwhile, inflation worries are tempered as well, whereas a weak dollar has often been cited as a counterproductive influence on local price trends.
Liquidity
Falling oil prices, meanwhile, send the broadly opposite message, of qualifying the prospects for Gulf budget finances, spending plans and liquidity generally. For the moment, the benchmark Brent series to which regional crudes mostly relate is holding close to the $100 level that must now represent a psychological peg, bolstered no doubt by the conflicts dominating media and spreading concern.
Research suggests that mere uncertainty itself can curtail business momentum, although perhaps less so in the Gulf than elsewhere, with its particularly localised buoyancy. It also finds that GCC stock market volatility is accentuated specifically by fluctuations in oil prices, the dollar and US Treasury bills (a guide to official interest rates). Indeed there is reason to believe that what happens in the US and Europe still holds greater sway in the investor mindset than how China is progressing, despite its emergence and the drama of its impact at the margin.
All told, markets today know that medium-term prospects are shrouded in mystery, and the current plateaus reached lack a very firm foundation. Get set for a squall in the Fall.
