A monthly column by Jeff Singer, Chief Executive, NASDAQ Dubai

Does the fundamental data now point to a recovery?

Few people prosper in a downturn. Bankruptcy lawyers and career advisers definitely, budget airlines maybe.

One industry whose services are much in demand is the financial media, whose articles have rarely been scrutinised so intensely for evidence of green shoots or withering vines.

It is hard to find clarity in the thicket of financial information that is released in the media each day, much of it seemingly inconsistent.

For example, the IMF predicted this month that the German economy will contract by 5.6% this year; then a few days later Germany announced an unexpected increase in exports in March.

The real estate agency Colliers said home prices in Dubai fell 41% in the first quarter of this year from the last quarter of 2008; shortly afterwards the Dubai government announced the economy grew by an estimated 1% in the first quarter.

These data do not contradict each other, but they make it hard to see the overall picture and to forecast when economic recovery will take hold.

To form a clear view, it is important to filter out the daily market dynamic noise and focus on the opportunities and fundamentals that now characterise the global economy.

These show that encouraging signs of recovery are now in place.

Equities price volatility, a closely watched measure of stability and confidence (some call it the "investor fear gauge''), has dropped sharply from the alarmingly high levels it reached in October last year, following the collapse of Lehman Brothers.

The VIX index, which tracks volatility of US stocks, has fallen from a high of 80.9 then to 38.9 in mid-April and 32.7 this week.

VIX values greater than 30 are generally associated with a large amount of volatility because of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.

Equity prices too are showing signs of recovery, with most international share indices rising steeply in the past two months.

In the UAE the share market rout of 2008 has halted. The FTSE NASDAQ Dubai UAE 20 index, which tracks 20 shares across the country's three stock exchanges, rose 11.6% in April to end the month 3.6% higher than at the start of the year.

Trading volumes have risen substantially this year on both NASDAQ Dubai and the Dubai Financial Market compared to the last few months of 2008.

Another fundamental is that interest rates globally are extraordinarily low. In the US the key short-term rate in a range from zero to 0.25 %, in the UK it is 0.5% and the European Central Bank cut its rate to 1% last week.

In this region, a corporate Sukuk index that NASDAQ Dubai maintains jointly with HSBC shows that spreads have narrowed sharply since February from a peak of more than 14% above LIBOR to less than 8.5% above now.

Still high, but a clear sign of returning confidence in borrowers.

In January, Dubai found itself in the unflattering position of being compared to Iceland, when the cost of insuring its debt through credit default swaps (CDSs) briefly rose above that of the highly indebted island nation.

That bleak assessment overlooked some regional fundamentals, which are that Dubai is an established financial and trading centre and is part of the UAE, a nation with deep financial reserves. Not surprisingly, Dubai's CDS position has returned to lower levels.

Also fundamental to global economic health are the vast government stimulus programmes put in motion over the past few months.

It is almost as though governments have decided that they will spend, so that the private sector doesn't have to; the public spending is of course designed to coax the private sector back to business as usual.

Certainly the amounts are impressive; hundreds of billions of dollars announced by first the Bush and then the Obama administrations in the US and huge sums in Europe and China.

In the UAE, Dubai's budget this year is 42% higher than in 2008, at 37.7 billion dirhams, and in February, Abu Dhabi injected capital into its banks while the federal government extended a 10 billion dollar loan to Dubai in the form of bonds.

The declining share price volatility, falling borrowing costs and narrowing spreads that we are seeing point to recovery. So does high government spending.

I will not attempt to forecast the timing and there is clearly more bad news to get out of the way first globally and in the region. Banks still have to unwind toxic assets and non-performing loans.

Consumers are still nervous about spending and asset prices and the price of issuing bonds may remain volatile for a while.

Europe may come out of recession slower than other regions, with badly hit countries such as Ireland and Spain tethered to a strong euro.

Not least, all the government spending will have to be paid for eventually and awareness of this will weigh on the recovery when it comes.

From several vantage points, it appears the economy is starting to move again and policy makers and business leaders are steering through challenging times.

One way we will know they have been successful will be when bankruptcy lawyers and career advisers are looking for work and we fly regular economy again.

Jeff Singer's views are his own. You can contact him at singer@nasdaqdubai.com

By Jeff Singer

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