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A lot of smart people have been saying for a long time the only way to solve the crisis is to transfer some of the risk from the financially weak countries (like Greece) to healthier economies (like Germany), who can afford to deal with it. Although this is happening to some extent, hence the second bailout, it is not happening on a wide enough scale to fully appease the marketplace.
Germany has remained resolute in its stance of not increasing the ceiling of the European rescue funds (European Financial Stability Facility and European Stability Mechanism), and, as the largest economy in the region, Germany would be the biggest contributor. Berlin's reluctance to add more funds is essentially holding back the international community from contributing more to solving the European crisis, both Japan and China are among the nations that have stated they stand ready to provide assistance if they see more of commitment from within the Eurozone first.
Optimism on Beijing's soft landing
Elsewhere, Beijing is facing the tough task of attempting to control a slowdown in the world's second largest economy. Since late last year, officials in Beijing changed the goal of policy from controlling inflation to controlling the slowdown in growth (real GDP growth yoy has fallen from 11.9% in early 2010 to 8.9% by the end of last year). Given the amount of room Beijing has to loosen current policy we are optimistic it will be able to bring China in for a soft landing, assuming the situation in Europe doesn't explode.
Dubai Financial Market grows on global stability
What does this mean for the Middle East? The Dubai Financial Market has eclipsed the gains of its counterparts in North America and Western Europe this year, reaching its highest level since late 2010 (currently it is in the green by around 26%ytd). But this should be taken with a grain of salt considering how hard Dubai's economy was hit by the financial crisis, resulting in a prolonged period of weak, even negative, economic growth. By the end of 2009 GDP growth for Dubai had slipped to -14.20%y/y, compared with flat levels of growth in the US at the same time. Thus, equities in Dubai were coming off lower levels than Western markets, giving them more room to climb.
Nevertheless, Dubai's equity market has proven to be jumpy when it comes to weakness in the international market, so we suspect the uncertainty that still exists the international marketplace may put a cap on upside potential. However, if Germany succumbs to international pressure and allows the ceiling on the ESM to be raised, we may see the international community invest more in solving the European debt crisis. In this instance, investors may take the opportunity to rally, driving equities in Dubai higher.
Staff
