It’s hard not to focus on oil when looking at the Gulf States; but with oil prices tumbling over the previous month, the weaknesses in the regions underlying economies are starting to cause concern among investors.
Dubai in particular is worrying. Its economy has been leaning heavily on real estate and tourism, both of which are reliant on demand from the west for a large portion of their growth. With developed markets likely to contract over the nest year or two at least, there is a good chance that a lot of new luxury hotel rooms and villas are going to be sitting empty. Although maybe not as many as there would have been. The credit crunch has made its way to the Arabian peninsular and is making it hard for many of the regions large capital projects to find financing. With oil ending the month at $65 per barrel, there are concerns that the region won’t have enough revenue to carry on spending its way through the downturn. It is unlikely that the GCC countries will be left struggling for funding, not with the huge sovereign wealth funds at their disposal. These funds can be prompted to pick up the slack if overseas investors take flight. But, if their investment in Barclays is anything to go by, assistance won’t come cheap. Increased finance costs will at least act as a brake on the pace of development.
The month also saw the first bank bail out in the region. Kuwait’s Gulf Bank took heavy losses in the currency derivatives market when a client refused to honour their position. In what is likely to be the start of a trend, the regions banks face an enormous amount of counterparty risk, due in part to the common practice of currency hedging in the region. A large rise in defaults would see the banks landing in a significant amount of bother. With western governments desperate for countries like Saudi Arabia to commit more funds to the IMF, a full blown domestic banking meltdown as has been seen in Britain and America might put a strain on the amount of free
capital left to finance grand building works, of the type that have become synonymous with the region.
Over the year to 31 October 2008 India appears to have fared decidedly worse than its gulf counterparts. The Bombay stock exchange Sensex index fell 50.07% over the one year period compared to a loss of 36.32% for the MSCI GCC Countries index. India too is proving to be as susceptible as anywhere to the current woes of the global economy. Despite the turmoil, India could still prove fruitful for investors willing to wait out the current down turn. The Reserve Bank of India is still forecasting economic growth of 7.5% for the year. With the threat of inflation, which topped 12% earlier in the year, now receding the bank is free to cut interest rates and stimulate the domestic economy. A fall of 50% in the stock market doesn’t match the countries economic position. Indeed, much of the fall is spurred on by foreign investor’s sudden distaste for risk and is in spite of strong earnings potential. Unlike most western economies, valuations in India had not grown much above their long term trend rate and few analysts were talking of an Indian equities bubble six months ago. With the Indian markets trading at near record low earnings multiples, the dividend yield on Indian stocks is likely to remain high even if earnings are eroded by the global downturn. Investors with any remaining appetite for risk could profit from investing in the Indian equity sector.
The purpose of this article is not to highlight funds, but the Aberdeen Global Indian Equity fund could be well placed to take advantage of the high yields currently on offer, and is worth a mention on that basis. The fund was in the top quartile for one year performance and has an alpha figure of over two, proving that the manager has been able to add value to the fund in the past, suggesting he could be well suited to making the most of the opportunities currently on offer. The fund has a high weighting to the IT sector which could be hurt in a global downturn as the sector has relied heavily on overseas demand. With job losses in the sector predicted to be as high as 25%; a more streamlined sector could profit from a domestic economy that is likely to increase its demand for information technology, as it continues to grow rapidly by international standards.