Dubai in phase five of the business cycle
Posted on 27 January 2009 with no comments from readersOrder my book online from this link
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.
Phase six
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.
Oil prices
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.
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Just a note for the person who keeps leaving a comment about the Burj Dubai and claiming that this project has been stopped. This is just not true at all.
You have confused this project from Emaar Properties with another project from Nakheel. The Burj Dubai has been topped out recently and thousands of workers continue to labour on its completion – now set for September this year. It is the Nakheel one-kilometre-high tower that has been ’suspended’ for a year – in fact only the concept was announced last October and detailed design work had not even started.
I can see that at times like these confusion can happen – but the Burj Dubai, the world’s tallest tower is unaffected by the current downturn, and I had a look myself to check this out!
On the other hand, a lot of planned projects have been stopped – perhaps just as well because the over-supply of property would have then been enormous – and other projects are progressing much more slowly. Demand for ready -mix concrete suggest construction activity is down 50% but that is still a great deal of construction.
Interesting article! I think Dubai already started to see some symptoms of phase six: Foreigner’s exit are on the rise, press very negative (I mean global media, we all know that local media will never be negative)and interest rates are very low and might reach 0% soon. I was wondering what phase zero, one, two, three and four comprise. At which phase does the market reach the peak? How long is the full cycle from phase 1 to 6?
Buy a copy of Marc Faber’s book on Amazon for the full story. The peak comes in phase three and phase zero is the bombed-out, base-building phase. The length of these cycles varies and the entire down phase can be done in 12 months – but phase zero can last for many years.
It relies on a ’spark’ or ‘catalyst’ to bring a recovery – for the Middle East that is always the oil price. I hope the US stimulus package will work and drive oil prices higher – but there is room for considerable uncertainty about that right now. On the other hand, you can be absolutely sure that recoveries do always happen, unless the whole world is in terminal economic decline.