Gulf fortunes tied to global markets

IMPORTING RISK: Gulf markets are becoming increasingly correlated to ailing western economies, Hussain said. (Getty Images)

The performance of Gulf markets is increasingly tracking global market trends as more foreign funds pour into the region and local investors become more sophisticated, Mashreq Capital's CEO has told ArabianBusiness.com.

Investors saw wild fluctuations in the markets at the end of the first quarter with some benchmark indexes registering their largest single-day losses in months on concerns the ill health of the global economy would spill over into the Gulf.

“There is and will continue to be increased correlation between local markets and global markets…we’ve seen that trend over the last year and that will continue,” Abdul Kadir Hussain said in an interview on Wednesday.

“We saw that correlation, [which] was either zero or negative in 2006, now go up to almost 0.4,” said Hussain.

The measurement is a basic indicator of how closely one market tracks the performance of another, with -1 meaning the markets show no correlation and 1 meaning the markets are very closely correlated.

Hussain said Gulf markets growing correlation to global markets was one reason for the increased volatility in regional exchanges.

Global markets have been hammered over the last few months due to the US subprime mortgage crisis and ensuring global credit crunch, and fears the US, the world's largest consumer, is headed into recession.

Hussain said he thought most of the initial subprime impact had been absorbed, but issues such as corporate real estate and corporate and consumer debt still loomed.

“There are more hurdles ahead,” he said.

Hussain warned local investors to adopt a cautious approach moving forward, while measures taken by Western central banks to shore up their economies begin to take effect.

“Our strategy is focused around the position of being fairly defensive, risk averse... at least through the summer,” he said.

“Hopefully be the end of the year we should start to see improving economic data as interest rate cuts start to feed through towards,” he said, predicting that markets will stabilise sometime around the end of the year.

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