Dubai-bashing was all the rage in recent weeks and the ‘saga’ has taken a new turn with Abu Dhabi coming onto the scene as ‘deus ex machina’ and providing a $10bn lifeline to relieve Dubai World’s debt obligations. This will probably dampen much of the indiscriminate negative bias and will allow investors to again focus on the fundamentals of Dubai as a regional business hub.As you know, during the past weeks we have been making the case for differentiating between the problems of a couple of Dubai domiciled corporations and the fate of the emirate and the region in general. We have insisted on the fact that there should be room for success and failure and that the problems in Dubai should be put in the right context along with the issues we have seen in the Europe and the US, problems that were often much bigger in $ terms. We keep on repeating this but things need to put in perspective, preferably one that has local insight as its main contributor.
Dubai as a city still has a valid business model (e.g. Airport arrivals are up 10% yoy) and its GDP only marginally declined. Its resilience is essentially helped by its close integration to growth regions in Asia and Africa. However there was and is a clear oversupply in real estate markets and this specific sector has certainly taken on too much leverage. Nakheel and Dubai World have to face these challenges. The restructuring process has only started and it will not be easy. However, the overall result should be positive as companies in general will probably become more rational. Let us not forget that most real estate companies have lost substantial amounts in projects in the US and in Europe when real estate prices declined. In addition, the recent losses on western investments (equities, banks, CDO’s,…) were also very significant and local investors have not forgotten this and are keen to invest in their own markets.
Is this indeed a ‘free lesson’? Maybe not for those who panicked and sold on the way down, but for those who understand there is more to Dubai and the region than just Dubai World and bought from the frantic sellers, it may well be a ‘free ride’. I chose the term ‘free’ because many lessons were learned during this 2 week ‘experience’ that is turning out not to be such a big bad loss after all:
- Going forward, investors in the region will be more inclined to ‘own what they know and know what they own’
- The local authorities have learned a lesson in communication.
- Local companies now understand they are part of a modern economy and are fully accountable for their business strategies.
- Global investors may have realized they need to better understand local markets (there are specialist investment managers who can help with this).
All this could lead to more transparency and better practices. However, one cannot entirely discard the possibility that the region may eventually opt for a more Chinese model: limited transparency and an internal capital market. Even if this happens, it should not pose too much of a problem as I am sure that most of you who read this are probably invested in China anyway. Also, we have seen other successful economies put up restrictions to reduce volatile and sentiment driven global investor flows (e.g. Brazil).
Enough said. We hope everyone can now again start focusing on the Middle East for what is really is: a strongly capitalized region with great infrastructure and a set of competitive advantages, located in the epicentre of a region where most of the world’s population lives. Unlike many other places, the economies of this region can still rely on internal financing and that in the end should be worth something. If you can believe this, then, just like us, you probably can’t believe the extent to which the Gulf’s markets remain so undervalued…
The world forgets how quickly sentiment can change. All investors sold off emerging markets end 2008 but by summer 2009, everybody again understood the power of the new world. 2010 will probably be the year where the GCC economies will go back to their medium term growth averages and leave behind the damage done by some of their bad investments.
The big question for 2010 remains that of how the western economies will deal with their debt. Abu Dhabi has financed Dubai debt. In the case of US/Europe, it is China and Middle East who are buying their government bonds and T-bills. If Dubai World were a reference, it could mean that the refinancing of western government and corporate debt can become very painful. Anyway you look at it, global investors are clearly running out of excuses not to diversify their portfolios and allocate to this region. You may want to consider it as one of your new year’s resolutions to do so!
Our weekly updates reflect last week’s markets. They are ‘action-packed’ with detailed insight into our markets of focus in Africa, the Middle East and Central Asia. I hope you can take the time to have a look and that they may provide you with further perspective on the great investment opportunities these regions harbour.
With kind regards from the Silk Invest Team.
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