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Short-term worries, long-term opportunities for Middle East capital markets

Middle East: Monday, March 14 - 2011 @ 12:48

“The downside risks are more related to the developed states in the West than to the emerging market economies in the East”, said Nouriel Roubini, Co-founder and Chairman of New York-based consultancy Roubini Global Economics.

High oil prices mean higher state revenues for the GCC, as more than two thirds of their income is commodity-based, while in the West, private consuming is the key driver of economic output. The macro-economic implications: “Inflation can run out of control, we could see soon double-digit rates in 2012”, Roubini says, adding that “the global economic glass is half-full and half-empty.”

According to Roubini, there is a trade-off between the private sector and State funds. “While firms have made good progress in cleaning up their balance sheets – US entities alone sit on $2 trillion cash reserves – governments have piled up immense piles of debt, which has increased currency risks and the possibility of partial defaults.” Roubini said as his key note at the Terrapin Hedge Funds World conference on the problems in the Eurozone, Greece, Ireland and Portugal in particular.

Effect of political reform on Mena exchanges

Implications for the Mena region, which saw the recent re-opening of the Tunis bourse and strong rebounds of GCC equity indexes are more complicated.

Haissam Arabi, CEO of Dubai-based Gulfmena Alternative Investments, told AMEinfo.com: “Certainly we advise clients to stay on the sidelines as there is no empirical evidence for what is happening in the Mena now.” According to Arabi, any analysis in the Middle East is driven from the top-down: “Political and currency stability comes before anything else.” Ongoing political instability in Libya, Bahrain and Yemen primarily drove foreign investors out of the region, “but we think the bulk of these negative effects are already prices in the markets”, says Humayun Shahryar.

Arabi stresses, that the majority of investors in the Mena region are retail investors, while in the developed world institutional investors have ever taken the lead. “This leads to higher volatility at GCC stock markets, trading is a very emotional issue here.”

Arabi concludes: “Short-term there is turmoil, with the danger of a spread. Will we see instability in GCC? The fear factor is growing, but on a mid-term to long-term view, there is change in the air, and change is good for the mid- and long-term investor. Even if governments are not toppled, the entire region has taken steps for reforms, greater corporate governance and political participation, a mix this part of the world can only benefit from.”

Greed and fear are driving markets. In challenging times, staying on the sidelines and retaining a cool head for being ready to re-enter markets can pay off. Meanwhile, Arab investors do not only wait for a political solution in war-torn Libya but also for the re-opening of the stock market in Cairo in order to regain confidence.

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Monday, March 14- 2011 @ 12:48 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.

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