It is ironic that the current emerging markets trauma emanated from the US and the EU, unlike the Mexican, Russian and Asian currency meltdowns in the 1990s. The $30 fall in Brent crude oil, the spike in volatility and the plunge in stock market indices in unison is a classic index of risk aversion. The August trauma on the MENA stock market indices suggests another bear market. Yet I doubt this scenario will happen.
One, the US has entered a soft patch, not a double dip recession while Asian growth is still robust, if decelerating. This means that oil demand will continue to rise, (albeit at a slower pace), not contract. This is totally unlike the case in September 2008, when the failure of Lehman Brothers triggered the worst, synchronised global recession since the Great Depression.
Two, Libyan oil exports have now ceased and geopolitical supply shocks will anchor the oil market. Three, the most crucible variable is Saudi oil policy. The Saudis ignored the OPEC quota system at the last Vienna conclave and unilaterally raised production to almost 10 million barrels a day (MBD) in June. Yet the financial mayhem in the Eurozone now means the possibility of an oil glut, a prospect anathema to the kingdom’s planners, whose budget breakeven price rose to $90 after the government’s $130 billion social welfare spending programme.
A U-turn in Saudi oil policy will put a floor under the free fall in oil prices, possibly in the $75-85 range. This, in turn, will indicate a cyclical bottom in GCC stock indices and MENA sukuk.
During times of financial stress, high beta bank, property developer, contracting and oil service shares should be sold as they have the highest correlation to global markets and Wall Street risk aversion metrics. Saudi petrochemicals or Qatari LNG companies, for instance, are natural high beta shares whose values will be gutted by a fall in commodities prices. It is also best to avoid illiquid markets, such as Bahrain and Oman, when the grizzlies rule the roost.
Dubai’s DFM index is too heavily weighed to Emaar and the banks, thus vulnerable to global bear runs. This means investors should take advantage of share bargains in defensive, high dividend growth sectors. This means Saudi telecoms and the most innovative, high speed data centric, high growth Saudi telecom is Mobily, the second Saudi mobile phone operator after the incumbent STC.
Mobily is still in growth mode, with 29 per cent annual increases in net income in its latest earnings report. Saudi Arabia is the largest, most exciting broadband market in the Middle East. As Mobily offers a three Saudi Riyal (SR) per share dividend, I see no reason why its shares cannot trade as high as 58 – 60 SR since its footprint, business model broadband focus and 25 per cent growth should easily command a higher multiple. Any fall in Mobily share price to the 40-42 range in case Wall Street contagion deteriorates could make an attractive entry point for GCC investors.
GCC and MENA debt/sukuk are not a safe haven during times of high risk aversion and a fall in crude oil prices. Yet deflation risk in the US will force the Federal Reserve to extend its epic monetary easing policy until 2011. Low dollar rates will anchor GCC credit spreads, which will widen as oil prices fall, new issues go into the ice age and fund managers scramble to raise cash. It was extremely prudent for Dubai to compete its corporate restructuring to avoid facing possible rollover risk as debt funding markets in MENA seize up, as in 2009.
High budget breakeven oil prices will also make Gulf sukuk yields rise as Brent oil prices fall. It makes no sense to bottom fish for value amid a global financial crisis. It is always darkest before dawn.