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Yesterday this blog explored the emerging market business cycles as suggested by Dr Marc Faber in his book ‘Tomorrow’s Gold’ and saw Dubai situated in phase five and entering phase six.
The real dilemma is looking forward to the next phase: phase zero. The last time Dubai came anywhere close to this phase was in 1999 with oil prices at $10 and local stock prices on the floor, at the tail-end of the Asian Financial Crisis.
The fear at that time contrasted with the much more modest business slowdown of 2000, and a quick resumption of growth back through the business cycle to our present position. Will it be the same again this time?
Certainly a long phase zero is a nasty business. Dr Faber identifies its characteristics as: flat per capita income; high unemployment; low capital spending; domestic instability; falling profits; capital flight; no foreign investment; hotels empty; stock market at a bottom base; stocks very undervalued; press very negative; credit tight; Swiss bankers give up.
Oil economies are perhaps a little different to this general model for all emerging markets. Capital spending is generally sustainable, and an exit of foreign guest workers leaves less scope for internal unrest.
Indeed, what is needed to quickly exit phase zero is also available. Dr Faber says it needs a ’spark’ or ‘catalyst’ to start the recovery cycle. For oil economies an upturn in oil prices is the usual catalyst, although the long stretches of low oil prices in the 80s and 90s should not be forgotten.
However, if you believe in a commodities super-cycle that began around 2000 then today’s oil price crash should not last long. The supply and demand economics of oil favor a higher price to encourage more oil exploration to replace dwindling reserves, which must sooner or later impact price levels.
It would also have an impact on all the markets in the financial sector, especially in foreign exchange and cryptocurrency market. To save your situation, it is best you should take the help of automated software. Our site will guide you through the entire process and benefits of choosing the trading software.
Oil is king
It should be no surprise to realize that recovery prospects in the region depend on oil prices. Dubai, as the regional logistics, commercial and financial capital takes about six months to feel an upturn in oil prices as it feeds through the orders pipeline.
But will the world’s economy get quickly back on its feet? That is a far more difficult question to answer. Clearly if that took several years, and not just until Q3 as some hope, then it would be bad news all round.
However, the global stimulus packages look hugely reflationary, and oil prices would surely be one of the first signs it was working. That would make buying assets associated with oil economies at this time a wise move, especially for those who can afford to wait a while.
January 27, 2009
Dubai in phase five of the business cycle
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Reading Dr Marc Faber’s investment classic ‘Tomorrow’s Gold’ it is interesting to note how Dubai has moved into phase five of his seven phases of the emerging market business cycle.
The symptoms of phase five are: tight credit; falling consumption; profits collapse; stocks crash; real estate prices fall sharply; big players go bankrupt; companies issue bonds or shares to raise cash; hotel vacancies rise; unemployment up; brokers lay off staff; tourism declines.
Of this list Dubai has yet to see any big players going bankrupt, and emergency fund raising is in its early stages. But all the rest of the list apply. For what lies ahead then we need to turn to the description of phase six of the cycle.
This comprises: investors give up on stocks; capital spending falls; interest rates fall; foreigners exit; currency weakens; press very negative; equity funds down 90%; hotels, flights empty; taxi drivers discuss how much they have lost; men go out for work in suits but sit in parks.
Dubai is not quite in phase six. But lower interest rates could be on the cards soon, and a weakening of the US dollar due to money supply growth is very likely. Job losses are clearly mounting but UAE labor law will not allow people to sit on park benches, they will go back to their countries of origin.
However, Marc Faber notes that the down cycle in emerging markets does not have to be very long, and he points to the Asian Financial Crisis of the late 90s which took a year to bottom out and a couple of years to start a recovery: phase zero.
In the oil-rich Middle East there ought to be considerable room for optimism about a similar early recovery on the back of higher oil prices. But that would still not seem to mean that phase six can be avoided. It just means that anybody buying assets in that period will not have long to wait to be rewarded.
No doubt many would argue ‘it is different this time’ in Dubai. However, as the great investor Sir John Templeton explained these are often the most expensive words in the English language for investors who believe them. It might be different this time but if you bet against history the odds are stacked against you.