'D' is for diversification (page 1 of 2)

On the first, there has been considerable focus on the stock market performances across the region in recent times. While sentiment had stabilised significantly, the recent correction in the Saudi stock market, which lost 15% in just two days, highlights the vulnerabilities still present in some markets - although the resilience in other markets has been quite surprising.

The question now is where is the smart money going? Given the amount of liquidity in the region, due to high oil prices, the answer is hardly surprising - almost everywhere. The most obvious destination remains regional initial public stock offerings (IPOs). For instance, over AED 3bn (just under USD 900m) was raised in the first quarter in the UAE alone, with one IPO garnering bids for more than the total size of the UAE's annual GDP. While this may look like irrationality, some of the peculiar pricing requirements mean that these issues are often relatively low risk with a high potential reward. Of course, as the market develops and the rules change in order to allow more equitable sharing of IPO gains between the buyer and the seller, then the risks will become more two-way.

There is also a lot of talk of investors looking for alternative stock markets to invest in. The performance, and possible overvaluation, of regional and nonregional stock markets, such as the Indian stock market, gives credence to this view. And many are suggesting that a lot of money is pouring back into the property market, particularly in Dubai which has been given a lift by the release of a property law that allows foreigners to own property freehold in certain developments.

Even the bond market is getting increased focus with governments starting to understand the benefits of developing a debt market (even in an environment of significant fiscal surpluses) in order to help manage excess liquidity and also provide a benchmark off which to price local currency debt issues. Saudi Arabia has led the way, although this is in part due to significant levels of domestic debt that has been built up over the years. Other countries are still in the early planning stages.

The second area of interest has been FX reserve diversification, particularly in the past couple of weeks. It started with the UAE central bank indicating that it may raise its EUR holdings to 10% from 2% of its total FX portfolio. Then other central banks suggested that they too might consider increasing the weight of EUR holdings in their portfolios. In reality, with FX reserves of around USD 60bn, what they do is hardly important in a global context. Only if the public investment vehicles with assets here estimated at USD 1-1.5 trillion, were to shift their currency composition significantly would this become truly important from a global perspective.

On the issue of trade and investment, recent developments have encouraged the region to reduce its reliance on improved trade ties with the US. The US administration clearly has ambitions to increase economic ties with the region. However, it is increasingly clear that while the administration can propose ways in which this can happen, Congress can just as easily push back. This is more than just the reverberations from Dubai Ports World's (DPW's) decision to sell its US ports as Congress highlighted concerns about a UAE government-linked company owning US ports for alleged security reasons - proposed legislation on the back of this is not just upsetting Arab countries, but is also being viewed as protectionist in much of the western world.