High oil prices and booming GCC economies have made 2007 a year to remember, and a profitable one for many local stock market investors after the crashes of 2006.
However, for the year ahead the main theme will probably be one of global capital market weakness. The US sub-prime crisis has not so far been followed by a big correction in US equity prices despite the weak outlook for corporate profits in 2008; so expect US equities to follow US real estate lower in the early New Year, and probably much lower.
The biggest surprise of 2008 may be a rally in the US dollar. This has already started over the past four weeks, and a stock market crash could speed this process up; arguably the 10 per cent correction last month started the recent rally in the US dollar, and this will likely continue as people turn dollar denominated assets into cash.
Wall Street crash
For GCC investors this relief to the long decline of the greenback will be welcome. But it could well be that GCC stocks will tumble along with Wall Street, as happened last August when the credit crunch first surfaced.
How far down local stocks would tumble on the back of a Wall Street crash is a moot point. They could fall back to the lows hit in the 2006 crashes which would be an excellent buying opportunity given the outlook for oil prices in the medium term.
On the other hand, a US dollar rally and stock market crash would be bad news for commodity prices, including oil and precious metals. The bold investor would again see this as a buying opportunity, and could realise a very nice profit by the end of the year.
As we said in recent weeks, gold and silver bought on this dip are probably the best tips for 2008 investors.
UAE real estate is the other banker for the year: US interest rates are likely to move much lower to counteract a Wall Street crash, reversing an initial US dollar rally, and with local inflation rates high then real interest rates in the UAE will be negative, usually an exceptionally favorable environment for real estate.
That also means that UAE real estate stocks bought during a period of market weakness – such as after a Wall Street crash – are also likely to perform very well.
One thing is for certain if the Federal Reserve does the utmost to keep the US economy out of recession or worse then the knock-on effect on oil prices and the UAE economy is likely to be very positive indeed.
The only caveat is that inflation is spiraling upwards due to a shortage of completed property, inflationary wage settlements and the peg to the US dollar. This could lead the boom to bust but probably not within a 12-month timeframe.
See also:Gold tips for 2008Precious metals and Asian currencies top tips for 20082008 outlook for currencies, stocks and commodities