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Sat 28 Nov 2009 11:02 AM

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Dubai triggers ‘overdue correction’ in stocks - Pimco

'Dubai is serving as a catalyst for an overdue correction in risk assets.'

Rising fears of a possible debt default at a Dubai state-owned conglomerate is the catalyst for an "overdue correction" in equities and risk assets, the chief executive of top bond fund manager Pimco said in an interview on Friday.

"Dubai is serving as a catalyst for an overdue correction in risk assets that have been supported by liquidity rather than fundamentals," CEO Mohamed El-Erian told Reuters. "While many have acknowledged in the last few weeks the growing wedge between market valuations and economic and corporate realities, few have been willing to take their equity exposure down. Dubai is changing all of this.

El-Erian oversees more than $940bn in assets under management at Pimco.

Equity markets came under severe pressure on Thursday after news that Dubai World, the government investment company burdened by $59 billion in liabilities, sought to delay repayment of some debt.

"We had taken down risk exposures in the last few weeks through sales of credit and spread products and, correspondingly, increased our holdings of Treasuries and other high quality names," El-Erian said.

Overall, the underlying characteristics of the Dubai announcement are similar to those facing commercial real estate in other countries, including the United States and Britain, he said.

"There will be contagion to many markets, especially in the emerging world where we are witnessing broad-based sell-offs among names with very different financial characteristics."

This is especially evident in the Middle East where risk spreads have widened for all names in the Gulf even though they share none of Dubai's vulnerable debt characteristics, El-Erian explained. "With time, this will provide interesting opportunities for investors," he added. (Reuters)

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