Global market mayhem

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Panic stations: stock markets across the world have witnessed a series of alarming slumps, following concerns over the state of the US subprime market.

It has been a decade-long party for the investment banks." The prolonged bullish attitude coupled with the relative inexperience of young bankers with volatility, causes Arif Naqvi, CEO of Abraaj Capital, to fear that markets "may experience knee jerk reactions". Finding anyone to express fear or pessimism about markets in the region is a difficult task. Even last year, when most of the world's worst performing markets were in the Middle East, the accepted analysis was that equity markets were undergoing a ‘correction'. Now, the fact that Naqvi concedes that something may go wrong exemplifies the uncertainty looming over global capital markets.

To catch a whiff of this fear of uncertainty and confusion, just take a quick scan of newspaper headlines over the past few weeks. While volatility in indices is nothing new, the underlying factor contributing to the current situation is a new species. According to the reports, markets are up one day despite concerns of a global credit crunch, or markets are down the next day due to concerns of a global credit crunch. The question on everyone's mind in the region is: how will the global credit crunch affect markets in the Arab world?

First, a brief review of how we got here. During the housing boom in the US over the past five years and amid low interest rates, lenders relaxed criteria and consumers with poor credit ratings received loans. These loans, the subprimes, were then sliced and diced into securities (with differing risk levels) to investors. Of course, investors today do not buy and hold assets; financial structuring and engineering have created a new system where trading is ever more exotic and esoteric, and almost always involves huge amounts of leverage, or borrowed money. When times are good, profits rocket and everyone is happy. But when the perfect storm that hits markets twice a decade rages by, panic ensues. Lenders make margin calls and constrict liquidity, forcing borrowers to dump positions to remain solvent - including massive stock sell-offs.

This storm began in the US, but has been seeping through to the rest of the world. Two weeks ago, the Federal Reserve in the US had to pump in more than US$120bn in liquidity to buoy the banks; in Japan, the injection was US$10.04bn; and in Europe, a huge shot of US$130bn was needed to allay fears. Stock market performance since then has been mixed, and credit markets remain tight.

Frédéric Buzaré, the global head of fundamental equity management at Brussels-based Dexia Asset Management, doesn't believe this is the unravelling of the global boom, but says that "there will certainly be casualties from this debacle". He goes on to observe that it will take years for the losses to filter through "given the time delays in foreclosing on real estate". The spate of gloom in the headlines lately mostly deals with specialist funds that had a heavy exposure to the subprime market. Buzaré advises that "investors should ignore the hedge fund headlines but watch the employment data closely", to get a better feel for where the economy is going. It is also important to look at insurers, as they are big investors in credit and stock markets and will be under pressure, as we are seeing with local insurance companies.

In the region, stock markets appear to have weathered the storm so far, as few are directly linked to the global economy. UAE markets, however, perhaps the most liberal in terms of allowing foreign investors to hold shares, steeply declined as international investors sold positions in an effort to meet the increasing demands on their capital structure. Emaar, the region's equity market stalwart and bellwether, has hit a 28-month low during this sell off. Earlier this week, the company disclosed that its US subsidiary would not meet its profit targets as it was because of its heavy subprime loan portfolio. Shares are now trading at US$2.72, a steep decline from the high of US$13 that it reached on April 12, 2005.

What is going on in the UAE markets is spooking some investors. Mohammed Al Ghussein, CEO of local brokerage Atlas Financial Services, tells Arabian Business that "no one is speculating anymore". This might be a positive sign of maturity in the market, but it undoubtedly exerts severe pressure on the index and leads to the evaporation of shareholder equity. The pessimism about the future of the markets is palpable to Al Ghussein. He believes that people are "fed up" with equity markets in the region, and "looking for alternatives". They lost trust in the market."

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