For those who perceive much of the world economy as all messed up with no particular place to go, the resumed buoyancy of global equity markets represents a separation of trends, a fork in the road.
Stocks are understood to discount real activity, by six to twelve months ahead, so climbing indices are either placing faith in an upturn that has been relatively faltering so far, or feeding off a massive liquidity impetus.
Whichever is true (perhaps a combination of both strands), in the Gulf sentiment has been sufficiently sanguine that regional bourses also have shown a spurt.
Every now and then that comparison is worth review. It appears now that at some point soon there has to be a reality check as to whether international benchmarks are anticipating genuine and concerted growth or rather reflecting, ironically, a preference for monetary assets over real business.
The recent pattern of rising bonds (fixed-income) again and falling or unstable commodities suggests that expectations of growth and inflation are very modest.
Stocks, meanwhile, are on the cusp of having to decide what they really believe. If the past few years have clearly been very different for the global economy, is it actually any different this time for stocks as well?
Japan’s latest, dramatic policy experiment, joining the cavalcade of quantitative easing by central banks, has not spilled over quite as expected to foreign investments, and the domestic debt dynamics are intimidating. A run of decent economic statistics in the US speaks of that country’s habitual resilience. Europe, putting it most succinctly, remains mired.
Typically a fund manager’s attention will turn to Asia and other emerging markets. The buzzwords of China and India have faded somewhat; latest Chinese manufacturing data were soft. This weekend an important election in Malaysia could set a regional tone.
Moreover, a key plank of the Asian miracle is the region’s ability to export to the advanced nations, so that an element of dependence remains which justifies an observer’s attention to the big but murky picture.
The Gulf, meanwhile, also needs to make its own headway. Oil prices, in the Brent benchmark, are hovering around $100, just enough to keep the bandwagon of regional prosperity rolling. However, for the medium term, Saudi Arabian oil minister Ali Naimi has conceded that the US’s shale oil revolution will inhibit the capacity and, therefore, revenue prospects of the Arabian peninsula’s dominant economy
In the UAE, a recent boost from first-quarter earnings, notably in financials, has given distinct impetus. Dubai is also apparently making such strides in its commercial recovery that the DFM index has surged ahead. Meanwhile, Abu Dhabi has stepped forward with counterpart plans for a financial hub, one further example giving the impression of self-sponsored momentum.
Al Masah Capital has measured their respective indexes as 32 per cent and 24 per cent higher in the year to date, leading all other GCC bourses (showing single-digit percentage increases) by far, with the exception of Kuwait (+27 per cent).
The temptation is to think that local indices might generate another separation of trends, namely of the Gulf distancing itself from the uncertainty globally. The further temptation is to believe that the bears have given in to the bulls in either arena, and the rally has further to run.
It has been noted that, in this regard, there are signs of such capitulation. It’s worth remembering, then, that cynical but successful investors will tell you it is when the little guy gets interested and enters the market that it’s time to be considering the exit.
At the very least, it can be no surprise if profit-taking transpires, especially if global economic strategy is in doubt.
After all, buying low and selling high over a recurrently extended period is still a wonderful prescription for building wealth, and markets are unmistakeably higher than they’ve been for a while.
In fundamental investment terms, euphoria all around is famously a signal to offload your investment.
