Arabian equities will rise as QE2 risks Asian capital controls as G20 meets

The G20 meeting of world leaders this week is a talking shop without any mandate, rather like the ineffectual international conferences that followed World War I and led to the Great Depression. But with the US now flooding the world with dollars under its QE2 program the onus to act is placed on Asian governments.

As interest rates and growth have dived in the US, investors have put their money into the still immature markets of Asia, putting upward pressure on currencies, forcing asset prices and stocks higher, and fueling up inflation.

Dollar carry-trade

This is the so-called dollar carry-trade which has not reached Arabia yet, although in his latest newsletter Dr Marc Faber suggests that this is only a matter of time. ArabianMoney editor Peter Cooper also pointed this out in an interview on City7 TV last night. Much higher oil prices are coming.

One response for Asian countries is to follow Brazil and to start restricting the flow of dollars from US investors with capital controls. If so it will serve to concentrate the effect of this investment into those markets that do not adopt them, and this is highly unlikely to happen in the Gulf Oil States as oil is paid for in dollars.

Does that mean Arabian stock markets will shortly get caught up in this US carry trade? it is a salivating prospect for these bombed out markets. However, most likely the first move for these bourses will be down as a global stock market sell-off gathers momentum as an article in Barron’s suggested today with technical indicators pointing to a correction through to the year-end (click here).

Bubble trouble again

That said this dollar carry-trade factor probably gives Arabian bourses a bright future once this sell-off is over. On the other hand, as Asian governments are only too aware this sort of speculative bubble has a habit of blowing up and causing even more problems that if it had never happened.

In the case of the Gulf States ramping up stock markets before a proper local recovery was in place would risk a repeat of the recent devastating boom-to-bust real estate cycle. Only traders who got in and out would profit and those suckered into the excitement might get burnt, albeit the participants would likely be mainly foreigners.

Has Ben Bernanke created a speculators’ paradise rather than the basis for a solid global recovery? Increasingly that seems apparent.