Dubai over-correction?

Posted on 16 November 2008 with no comments from readers

The Dubai stock market lost another 4.5 per cent of value today, after shedding a massive 25 per cent of its market capitalization last week. Bellweather stock Emaar Properties is down 80 per cent.

So does Dubai face imminent bankruptcy and collapse in 2009? Far from it, infrastructure projects will continue to be built. The Burj Dubai, the world’s tallest building, will be finished next summer.

The government is clearly short of money but not running out, and Abu Dhabi is a wealthy cousin whose help will come at a price but not an exorbitant one.

The city is suffering from inflation and traffic congestion, in short an over-heating economy. This cool down is to be welcomed and is a correction and not a crash.

The international logistics center of the oil-rich Gulf States is well positioned to survive the global economic recession next year, and will probably emerge all the stronger for having shed its weaker projects and business persons.

Business cycles

Let us not forget the cycle of capitalism is not an upward line on a graph. Fortunes rise and fall and the best survive and the weak do not.

In the context of the Dubai stock market the animal spirits are getting carried away into an error of pessimism. Emaar stock last plunged like this in 1999. If you had bought then and held for seven years you made a 15-fold profit.

Now if the world had discovered a rival energy source to oil I would have some sympathy with local investors who are throwing in the towel. But nothing has changed.

Oil prices

The supply and demand position for oil in a world of diminishing reserves is compelling, and even a very sharp dip in oil prices next year is unsustainable. Prices will rebound thanks to the multi-trillion dollar stimulus package that governments are providing.

It is not just the coffers of Abu Dhabi that will save Dubai by rolling over its debt in an emergency, the whole world is propping up the oil price with its huge public spending plans, and Dubai will get the benefit of both.

That is clearly too late for stock prices, and perhaps to prevent a nasty real estate crash, but the recovery is already baked in the cake.
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