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Market's moment of existential angst
Two weeks ago we decided to invest in a plasma television. The family was all so excited that my son wanted to instantly get rid of the old TV, an obsolete piece of technology that has been a fixture in our living room for nearly a decade.
- By Babu Das Augustine, Banking Editor
- Published: 23:58 August 15, 2008
Two weeks ago we decided to invest in a plasma television. The family was all so excited that my son wanted to instantly get rid of the old TV, an obsolete piece of technology that has been a fixture in our living room for nearly a decade.
Next morning, as usual, I sat down with the morning cup of coffee to scan the newspapers. Not before long I started developing cold feet towards the family's plasma TV aspirations.
The provocation was a news item. The headlines in most newspapers that day screamed about the beginning of the end of the property boom in the UAE, based on a report from Morgan Stanley.
The report said property prices that have increased 79 per cent since 2007 could drop 10 per cent by 2010. It suggested that in a worst-case scenario Dubai property prices could follow the pattern of Singapore in the late 1990s when prices plunged 80 per cent in 18 months, although it was a "low-probability event."
I am not an investor in the UAE's property market. But the report indeed struck me hard enough to take another look at my priorities, for the simple reason that at the macro level it is the property boom that is at the core of almost every economic activity we see around.
Share of GDP
While the sector dir-ectly accounted for 16 per cent of GDP last year, it constitutes more than 35 per cent of private sector economic activity. Any big correction in property prices could mean a drastic resetting of the economy that threatens the very viability of many businesses and jobs, resulting from the knock-on effects.
Over the past six years real estate has evolved into a very important asset class in the UAE, with a growing presence in investment portfolios and balance sheets.
In the event of a big correction, the contours of many a fortune would be redrawn, while many balance sheets would face massive restructuring.
The report has attracted wide attention, and it has also been widely blamed for triggering a stock market correction last week. While the Dubai Financial Market slipped close to nine per cent in seven trading days, the Abu Dhabi index recoiled more than 12 per cent during the same period.
The crash has come at a time when attractive valuations combined with strong corporate results were setting the stage for another bull run. Although various analysts have attributed the slide to other reasons, such as a sell-off by foreign investors, hedge funds and currency speculators, clearly the fear factor is playing an important role.
While the role of Morgan Stanley's views on the real estate sector is open to debate, the market's reactions last week show that people must be uncertain and confused about the direction of the real estate sector and its consequences on their lives.
There's a parallel between the abrupt end of my plasma TV purchase and the recoiling of local stock markets. It looks like the fear of the unknown is weighing on people's minds, resulting in knee-jerk reactions at the slightest provocation. Not just on the markets last week.
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