Assessing down cycle risk in the Middle East

First, Dr. Azzam highlights a bigger than expected US housing slowdown which could impact consumer spending and asset prices and hence hit the hedge funds that are supporting the oil price by some $30 a barrel.

Secondly, a US conflict with Iran or Venzuela could spill over into a manipulation of unregulated hedge funds to trigger a market crash that would damage the US economy and hence demand for oil. Thirdly, the region's real estate markets could follow the local stock markets with a sudden crash.

Fourthly, the US might decide on a sudden pull-out from Iraq and let the region fall into anarchy. Or finally, tensions in Lebanon could spill over into the wider region and precipitate an Israeli attack on Iranian nuclear installations.

More wild cards

This is quite a list of wild cards, but it is not exhaustive. For example, a big private equity deal could go badly wrong and trigger a financial crisis, totally removed from the region, which would impact badly on oil consumer nations. Likewise a large hedge fund could implode and cause a crisis in global capital markets.

Of course, if you fully assessed the down cycle risk every morning, you would never get out of bed. Life is too short to worry about everything.

But famous economists like Dr. Henry T. Azzam only write such articles when they 'expect the unexpected' as he tells readers to in the conclusion of his piece. This is also a wake-up call to those who blithely ignore risk in today's markets.

Mideast equity blues

It is perhaps therefore ironic that Middle East stock markets are the only capital markets in the world where significant downside risk is now being discounted. Markets plunged in 2006 and have headed lower in 2007, so investors appear only too aware that all is not well.

The trouble is not just expecting the unexpected but knowing which unexpected scenario to expect. Maybe that is why precious metals are now at a seven-month high as cautious investors generally favor cash and precious metals over equities and bonds.

It might also explain why new project launches in the Middle East have slowed so far in 2007 after the cascade of new developments right up to the close of 2006.

Indeed, there is one more regional risk to add to this long list. Namely that the oil boom is looking rather old and that the business cycle is due for a downturn. Traffic problems, soaring salaries, high inflation and growing competition in many sectors are the normal signs of a peak in the business cycle.