Emirates NBD CIO: Greece's demise is only a matter of time (page 1 of 2)

The Euro zone tried to herald an agreement that had Greece implementing significant spending cuts and the Euro zone providing the next wave of funding to keep Greece solvent. However it is slowly dawning on all, that even with the best of plans, Greece would still have an extremely high government debt ratio of 120.5% even in 2020.

The situation is plainly unsustainable. Greece will ultimately be forced to default and go through a painful process of resetting its economy. To us it is only a matter of time before Greece is forced to leave the Euro zone. The Greeks could just trundle along in the near term giving the markets just enough to get by for a few months if not a year. Equally the situation could just crumble overnight.

The next IMF meeting will see whether there is global financial support for Greece (which we doubt). The next few weeks will see a number of European parliaments debate the latest Greek plans. There are already signs of serious political dissent to any further support for the Greek government.

Higher oil prices reflect fundamentals and geopolitics

One of the challenges for markets is the rise in oil prices. In the last few days oil prices have risen to a nine-month high. In our view higher oil prices are here to stay. Much has being made of the potential greater geopolitical risks but the 'high' oil prices are also due to an ongoing fundamental imbalance between supply and demand.

Even though global economic activity is expected to be sluggish this year the changing mix of growth away from the west and to the east is leading to a greater intensity of use of oil. Also emerging market demand for oil is much less sensitive to the price of oil. So if with the recent rise in oil prices the strength emerging market demand is not likely to be impacted.

Aggregate demand for oil is expected to rise 1 million barrels a day this year. Meanwhile supply remains constrained - the world's largest 580 oil fields are seeing output decline at around 5% per annum (source: UK Telegraph).

Saudi equity market could see further 30% rise

The rise in oil prices is good news for GCC economic growth and financial markets. The Saudi Taduwal index in particular could have a lot further to rise. I don't say that with any great unique insight. However what strikes me is that all the hallmarks of previous rampant bull markets are in place again.

Retail investor interest in the market is high. The recent rally in the equity market seems to have stirred investors to even switch money from their love affair with property to equities. The valuation of the market remains at a reasonable level. The prospective PE of the market at around 14.0x is not that cheap relative to global markets. However for local investors maybe only a PE multiple closer to 18.0x would represent a point at which they might pull back from further purchases.

The potential is for a further 30% upside in the market. The main reason behind our thinking is the weight of money. The KSA is generating strong GDP growth, strong money supply growth and strong profits growth. In 2011 government spending increased by 25% and strong retail sales growth has added to the momentum in the economy, that's before we even talk about the benefits of the recent rise in the oil price. Last year's growth is percolating down through the economy and leading to strong flows of capital into the stock market. The equity market is at risk of even more exaggerated rise to the upside.