Financial Crisis for real

Warren Buffet’s tenet: “Be fearful when others are greedy… (and vice versa)”

While many will say that the Middle East shouldn’t pretend its not happening, most don’t believe its going to hit here, and some see it as a big opportunity to prove some fundamental values.

Why such a sharp drop in the Equity Market?

Prior to the global panic selling that escalated in recent weeks, the local and GCC markets were lower for the year.
First, concerns about corporate governance contributed to negative sentiment.
Second, concerns about real estate markets around the globe against a background of tightening credit began to weigh on minds.
Third, commodity prices of all stripes began correcting on expectations of a slowing global economy. Some global investors had used exposure to the GCC equity markets as a proxy play on the commodity cycle and were unwinding these positions as commodity prices softened.
Fourth, the effects of liquidity being mopped up by GCC central banks began to be felt – for instance in the form of higher reserve requirements in various countries – and later we witnessed a material rise in interbank rates GCC.
Fifth, fears of some sort of an attack on Iran kept popping up in headline news periodically.
Finally, global markets went into a panic sell off on fears of a deepening banking and credit crisis as well as the weakening U.S. housing and consumer outlook.

The global crisis that has spilled over into the UAE and GCC markets has resulted in dramatic and rapid price decline in asset prices.  What could have been considered as “normal” and transitory correction in UAE markets, quickly degenerated into a panic.  This resulted in wholesale, indiscriminate selling at any price, regardless of valuation, business model, industry or specific financial situation across the entire world.

Many say that stocks globally and in the UAE are headed lower. It’s not sure that the bottom has been reached, nor it’s sure that there won’t be more heightened volatility in the very near future.

But from history as a guide, NBAD analysts say that bull markets follow bear markets and in each previous case, investors should have been buying or holding, not selling.

Bull markets do follow bear markets and the downside at the end of bear markets is very small compared to the initial up-thrust of the next subsequent bull market.

It is worth noting that in the stock market, when items go on sale and shares are marked down, people sell.  In the grocery store, auto store or clothing stores when there is a sale people buy.

Going forward

Regional markets are better positioned to weather the turmoil than almost any other market in the world because of the strong overall fundamentals.

However, the appetite for risk aversion – and hence equities – is clearly at a low at present, but this will change as normality gradually returns in the markets.

Big spenders in the region either can’t afford to stop spending, or can afford to spend and will do so to support local economies.

In the government sector, spending will continue as governments try to support local business, and because they need to carry on investing in crucial sectors like healthcare and education to meet the needs of a growing population.

For banks and other financial institutions, putting systems in place to manage compliance and other data management issues can’t be seen as an optional extra for the region any longer.

In the telecoms sector, while operators are likely to slow down on implementing the most cutting-edge technology, many are government owned businesses, operating in de-regulated markets – they need to spend to stay in competition.

While big bang projects are likely to be shelved, consultancy and services projects that help get the most out of existing infrastructure, and outsourcing by western companies looking to cut costs, will keep the region’s service sector busy.

Bullish approach could be a realistically aggressive way to tackle a difficult situation – have your say…