If Gulf stocks have a neutral tone about them right now, it’s an appropriate reflection of the wider world they are bound to respond to, at least while oil prices are down. The external landscape is confused to the point of bewildering and even surreal.
Try a simple, imaginary anecdote. When the prices of everyday items go up, what do you do: buy more of them? No, me neither. If it’s discretionary spending, not vital to daily needs, you would probably hold back. And when prices go down, perhaps reaching bargain levels, and you have a bit of spare cash, would you buy more then? Quite possibly so. How about something more like a treat — would you buy it if it was on special offer, but not if it became expensive? Sounds reasonable.
Most items fall into that category, beyond the regular essentials. Granted, buying into property or another investment might involve a different approach, anticipating a price appreciation of the asset itself. Delaying the transaction might lose you money, relatively speaking. Plainly, though, most purchases aren’t of that type. Only the flashy spend more on things when the price rises, in what’s known as conspicuous consumption.
So you might be wondering how such basic concepts have been forgotten in the rush to the international quantitative easing (QE) that supposedly underpins world recovery, targeting inflation.
Economists are very fond of telling us that national economic policy is not like managing household finances. The movers, shakers and schmoozers will nod sagely too. So the evidence to the contrary passes them by. Deflation only gets nastier in their view. The debt figures today are so ominous that they can’t imagine it any other way.
Yet, take Spain, a large country with a chequered economic past, but among the main players of the European Union. It is classed as one of the periphery countries within the Eurozone, currently applying fiscal restraint to try to become competitive again. It is said to be suffering badly from austerity.
Except that unemployment, though still high, is falling steadily. Moreover, consumer spending is rising rapidly, just as prices fall. In fact, deflation is accelerating. Wouldn’t you know it? Compared with level incomes, dropping prices are enticing the Spanish to rediscover their wallets and succumb gently to a modest feel-good factor.
Sideways pattern
Meanwhile, Gulf bourses are steady to positive, but benchmark markets are cottoning on to QE’s increasing ineffectiveness, while gorging on the proceeds of this artificial liquidity. Global investors have increasingly to be sharply attentive to daily developments. And the Gulf is still very exposed to the uncertainties of these manoeuvres and whether they will triumph or falter. Hence the emergence of a sideways pattern locally.
Recent talk is that the oil price cycle may have troughed, with suggestions that shale investment will be so shut out of the equation now that prices might rebound to some $150-200 (Dh550.50-734) in the foreseeable future. That kind of supposition foretells a very febrile atmosphere. The criticality of the Greek-German dialogue at the heart of the Eurozone fiasco really should put everyone on edge, with the fate of a huge economic bloc at stake. And negative yields on several European sovereign bonds of longer maturities only adds to the sense of disarray.
Once again, can Gulf markets conceivably be viewed in any degree of isolation from world events in this context? Can they be spared the effects of policies at an international level that are designed essentially to transfer resources from the creditworthy to those heavily in debt, and to keep doing so until the deckchairs are arranged in time for the global ocean liner to meet a devastating iceberg one dark night?
That element of market fear and suspicion is likely to linger now. One thing’s for sure: Gulf countries don’t have price deflation, yet, still growing too fast for that, slowdown notwithstanding. It will take a surging dollar (and pegged currencies) and higher interest rates from the US to introduce that particular, supposed danger.
