How the Wall Street gloom affects the Middle East

But what does this mean for the Middle East in 2008? The year has certainly opened with an optimistic high that is almost a mirror image of the pessimism now sweeping America.

Yet as AME Info argued last week, the euphoria of $100 a barrel oil was likely hubris and the top of the market. With oil down to $92 last week on recession fears, that looks to have been the right call.

Local stock markets have weakened in the wake of a downshift in oil prices. But the real problem for Middle East equities may be that too much optimism is now priced into the market. We know that 2007 corporate profits will be up by 25 per cent plus in many cases. We know local economies are booming, albeit with surging inflation.

Decoupling over?

However, the old adage that when the US catches a cold everybody is in trouble should not be forgotten. Goldman Sachs says this is the year when the decoupling of the world economy from the US ends.

For the Middle East that will mean a lower demand for oil from a recession hit US and a slowdown in the booming emerging markets. Typically, the business cycles of the latter are severe, so this could have a more dramatic impact on oil demand than a complacent world has considered possible.

That would mean that equity market weakness in the US might well get a lot worse before it bottoms out, and that this contagion will impact on emerging markets that have swelled in value as investors avoided US equities.

The stock markets of the Middle East have been great beneficiaries of this influx of hot money from overseas in the past three months, and it could be that this rally evaporates rather more quickly than the optimistic forecasts hoped at the end of 2007. Money could go home just as fast as it left.

Dollar recovery?

This may also fuel a completely unexpected recovery in the US dollar, with funds from the emerging markets flowing back into America, while at the same time a further liquidation of stocks on Wall Street will effectively increase demand for cash. In any case tighter global liquidity since the sub-prime crisis is supportive of the US dollar, as is the weakening economic outlook in the UK and Europe.

But business interests in the Middle East should not panic as government spending is unlikely to be immediately reigned back, rather cash-rich governments will be keen to be seen to continue spending and support economic growth.

The sovereign wealth funds could, after all, choose to invest locally rather than globally, although they will be doubtless attracted by still lower equity prices.

See also:
Is 2008 the year the markets crash?
Volatile outlook for UAE stocks in 2008