The GCC economies had been impervious to the global credit crisis for the better part of 12 months. While many people believed that the Middle East’s oil wealth would protect their economies from the crisis, these expectations have proved baseless. The falling equity values impaired sovereign wealth funds and lack of access to credit derailed numerous grandiose property development plans leaving some skylines littered with idle cranes. Economists predict the current conditions will stable and persist for the most of the remainder of the year. The end of this year (2009) through 2010, capital market conditions are expected to stabilize and improve. In this crisis no country is an island, as even Australia recognized its economy was in recession. Virtually every market of the world has experienced sharp declines save for the one uncorrelated market that posted positive returns, the Tehran Stock Exchange. Enough said.
The current situation finds the world economy trying to establish a base from which to grow supported by the most massive, concerted global government economic intervention in the history of the world. The bailouts and stimulus packages to date have targeted banks and countries and the auto industry. Yet as the unemployment percentage surges into double digit numbers, the consumer who was footing the tax bill will move from being a tax payer to recipient of tax benefits; credit card payments will laps, mortgages lost. The cascade downward will continue as more business will contract, more foreclosed houses in the market and higher credit hurdles and terms for new homeowners. The impact of a global shutdown due to swine flu could well trigger a cataclysmic economic freefall that even threatens the stability of longstanding democracies.
Given this backdrop, the question is, ‘what’s the best strategy to employ to capitalize on this economic imbroglio?’ The answer, my friend, is that ‘cash is king or queen if you prefer.’ Even with that, knowing which currencies to hold is also a critical analytical exercise. Several countries have individual private banks with outstanding notional debt that exceeds their country’s GDP! We recommend a basket of currencies that overweight natural resource backed economies such as Canada and Australia. Sometime next year, those patient investors holding cash will be plundering egregiously underpriced assets boasting global brands and predictable cash flows.
David E Simpson is a Director Investment at Starling Group