Black swans flying all over the region warns top Abu Dhabi royal family advisor

Posted on 09 March 2011 with 1 comment from readers

There is a whole flock of black swans flying over the region at the moment, top Abu Dhabi royal family advisor and veteran regional analyst Matein Khalid told delegates to the Hedge Funds World Middle East conference in Dubai yesterday.

He is betting on the VIX uncertainty index as his alpha play, and also investing in the Russian oil companies Lukoil, Rosneft and Gazprom. His forecast is for a volatile few months ahead in financial markets.

Mr Khalid is worried about the five to six million barrels per day that Saudi Arabia is supposed to have in spare capacity, and noted that assessments provided by Wikileaks suggested that it would take 10 years for the kingdom to produce 12 million barrels per day. He saw two million barrels per day as a more realistic assessment of global spare capacity.

Spare capacity low

‘What happens if we have supply disruptions in Iran or Algeria, or Iraq which now produces 2.5 million barrels per day?’ he said. ‘Algeria had a horrible civil war in the 90s with hundreds of thousands killed.

‘For every one million barrels per day lost this means a $20-25 increase in the price of oil. In 1979 Iran accounted for just three per cent of global oil supplies and that was enough to send prices spiralling upwards.

‘The smart money is on an escalation of the current crisis’, he added, saying that he was long Russian oil stocks as the best bet on higher energy prices. At the same time Mr Khalid has his lowest asset allocation for equities in the Middle East.

‘The biggest problem is liquidity. Even in Saudi Arabia there is a fraction of the liquidity of four to five years ago. The liquidity is nowhere near somewhere like Russia or even the secondary markets like Poland.

‘There are no hedging instruments in the Middle East so you are stuck in long positions only. Corporate governance is a joke. How many bank CEOs have paid the price for overinvestment in real estate? Something is also very wrong with the IPO system.’

Egyptian bourse still shut

Mr Khalid is also extremely disturbed by the closure of the Cairo stock exchange, the oldest stock market in the Arab world, with 25 per cent foreign investment.

‘It has lost credibility and the economic reform agenda has gone. This breaks my heart. It is like the end of the Ottoman empire a hundred years ago, the old order is crumbling’.

That said he still reckoned there ‘could be great opportunities’ in the future in the region with oil prices so high. The next issue of the ArabianMoney newsletter will highlight some of these upcoming opportunities (click here).