Businesses look for the right direction

Dubai: Nearly two years after the collapse of the Lehman Brothers in mid-September 2008, that almost brought the global financial system to a standstill, investors are getting mixed signals — a situation that makes investment decisions risky.

Impatient investors are asking the obvious: How long this downturn will continue? Are we at the end of the beginning or at the beginning of the end?

"The first stage of government intervention in what is likely to be a long haul out of the post-Lehman crisis is drawing to a close. The challenge going forward will be to see if the eye-watering stimulus packages applied to world economies have real durability, or whether — as soon as policy makers start to reverse these programmes — economies slip back, Japanese-style, into near-zero deflationary growth," a latest report by Swiss private bank Sarasin, said.

Results

Guy Monson, Chairman of the Investment Policy Committee at Sarasin, says, "To date, where governments have ‘tested the waters' and cut stimulus, the results have been decidedly mixed.

"It is this uncertainty among businessmen, economists and politicians alike that is driving investors into the arms of the government bond markets."

However, this won't last for very long — either economic growth stabilises at some point, bond yields normalise and stocks rally, or else central banks release more liquidity, yields fall further and ultimately investors buy blue-chip stocks for their balance sheet strength and yield, Sarasin says.

Sarasin suggests investors "be cautious on higher risk investments for a while longer, and to be patient, but also to sit back".

With a slower economy in the US and China and fiscal austerity at home, inflationary pressures in the euro area are unlikely to emerge, making the ECB exit strategy from its loose monetary policy unlikely before mid-2011.

Gulf situation

The situation in the UAE and elsewhere in the Gulf remains the same. With bleak outlook for the real estate sector, that once drove the economy, commodities and equity remain the best bet.

"The economy of the UAE is passing through an eventful phase ensuring that it is well aligned to the economic realities and challenges of the future," Sultan Bin Saeed Al Mansouri, UAE Minister of Economy, told Dubai's business community last week.

"Consultation and broad consensus will take the ongoing economic reforms and reorganisation in the country closer to its targets."

The UAE economy is presently at a crossroads that will prove critical to the manner and speed in which it emerges from its present malaise, Daman Investments said.

"There are tough factors to consider, and tough decisions to be made," it said.

Shehab M. Gargash, Managing Director of Daman Investment said, "Two years into the global economic crisis one thing is crystal clear: The opinion that the crisis will be over in 24 months and that it will be business as usual after that has proven to be highly optimistic."