Dr. Gerard Lyons

'Over the past few years the world economy has handled all sorts of economic, political and financial shocks, and that resilience has encouraged complacency, taking us into a low yield, low return environment,' Dr. Lyons told AME Info, speaking after his breakfast presentation.

'Markets have become more highly leveraged with hedge funds and other borrowing to increase returns. This works in a favorable environment, but it made betting against the dollar last year, for example, even more painful.

'In 1998 we saw the trouble that LTCM (a hedge fund) got into, and there is a danger that this could be repeated in an atmosphere where markets are not pricing in risk.'

Gold as a hedge

The one exception to this rule seems to be the gold market where a rising gold price surely indicates that investors are becoming more risk adverse. Is this a phenomenon that is set to continue?

'I think analysts are putting too much stress on gold as a hedge against inflation, gold's real appeal should be as a safe haven asset and as a play on the strength of commodity prices in general. So there is a case for holding gold as a part of a balanced portfolio today.'

Dr. Lyons talks of the 'permanent oil shock of 2004' which is when economists believe oil prices moved to a new higher level, leaving behind their past price band. But he distinguishes sharply between two different types of price movements.

Supply side oil shock?

'First, we have seen that in recent years the global economy has been able to cope with a demand side increase for oil. The problem may come with a supply side shock, possibly from Iran, although geopolitics is hard to predict. Here again the markets may not be pricing in enough risk.'

On the economies of the Middle East Dr. Lyons pointed to the need for countries to become more open and diversified to handle the impact of a growing young population.

'In most parts of the world economists look at a growing young population and say this is a good thing, but strangely not in the Middle East. This is nonsense! A youthful demographic profile is an advantage in this region too, providing that policy makers get it right.

'The UAE and Qatar have led the way in economic reform and the other states need to follow. There is still a tendency in Kuwait and Saudi Arabia to say that we have plenty of money from oil, why do we need to diversify? Clearly if you are to provide jobs for a youthful population, then diversification is essential.'