Monday 30 November 2009

Ex-Patting the UAE

Okay everyone, let’s just take it easy. The markets across the Middle East (those that are open at least) are of course limit-down (DFM -10% ADX -10%), but when something like today’s market fall has been so widely expected, the surprise, no matter how negative in its effect, is nipped at the bud.

The reaction, indeed the exceptional over-reaction in our ever-so-favourite-balanced-and-oh-so-knowledgeable-British-press reeks of something almost as fetid as a British PM’s expense account. The quite frankly ridiculous amounts of joyous criticism of “Dubai’s dream turned nightmare” and other such inflammatory headlines (yawn) found throughout endless articles, gleefully resurrecting discussions about the demise of a once admired and desirable destination has amazed anyone that has spent a decent amount of time travelling around not only Dubai itself, but the rest of the UAE and the GCC in the last few days.

The western press, made-up of simple-minded media commentators caught-up in the thrill of attention that a disaster-scenario can only bring, have all pounced upon the great excuse presented last week – this was always going to happen. The international markets had been rising contrary to economic indicators and investors took the opportunity to sell during the ensuing kerfuffle. Just as those markets have bounced back though (Asia very strong today), in a few days and certainly in a couple of weeks, rational thought and considered analysis of the Mid-East region will prevail and what some suggested straight-off-the-bat last Thursday will strengthen in its conviction – this is only a good thing for the region, and indeed Dubai itself.

Short-term ignorance…
Is anyone else out there that knows even the slightest bit about the Middle East bored of the ignorance expressed by those that probably wouldn’t even be able to point out the UAE on a map? - for that matter, they are perhaps the same people that wouldn’t even be able to point out their own home-nation on a map. With much of the region on holiday there has been ample opportunity for families (locals and ex-pat alike) to make use of the pleasant weather, comparatively modern and well-thought out shopping facilities and family-orientated offerings, accessed through decent infrastructure, to shrug-aside the international overreaction and express the very reason why Dubai is set to survive – if albeit not thrive as it restructures over the next 12mths. There is no other viable alternative in the entire region – not for now, and not for another 5-10yrs.

The single most important element to remember about Dubai – apart from the fact that it has actually created and purchased some excellent brands and assets including Emirates Airlines, Jumeirah Estates (which owns revenue generating hotels and properties both in the region and internationally), Emaar (well-constructed and essential shopping facilities), Dubai Ports and even its domestic utilities firm DEWA – is that it is not a city dependent on the much mentioned western ex-pat. Indeed the entire region is not.

Ex-pat allure
Dubai has and now certainly always will be primarily a destination for the heavily overpopulated and very low average-earning sub-continental ex-pat. Regardless of the difficulty in obtaining hard-facts, what we do know still speaks for itself. Property purchases (as deemed by Emaar in recent releases) have been heavily skewed by UAE, Indian, Iranian and Pakistani residents in Dubai (24%, 15%, 15% and 12% respectively). Many of these end up as landlords and may well have been hit-hard by the sudden crash in prices and the abundant escape of western ex-pats to their (cold) homelands, especially with the largest growing ex-pat population almost disappearing back into the pubs of Manchester in one fell swoop – (didn’t they only came and sit in pubs here anyway?). Even with that exodus, it is still a very small section of Dubai’s predominantly sub-continental population - Asian ex-pats make up 65% of the current population, “others” only 4%.

Lower prices, higher growth
A great deal of attention has been spent on attempting to understand the political machinations taking place behind the scenes to make sense of whether or not Abu Dhabi actually supports Dubai etc. How about spending a little time on trying to figure out what Dubai will have to do in the next year or so regardless of the political manifestation. A simple solution screams through the mess. For the last year, Dubai has held in its hands a tough pill to swallow – but one that after an initial spurt of painful ego-reduction would usher in a period of renewed growth, albeit at a very different pace and with a visibly dissimilar look and feel. The pill is lower prices.

More affordable homes, better value-for-money hotels and an end to an opaque set of indirect taxes in a supposedly tax-free nation would attract a good number of new residents and visitors. Indeed, the city has tried to hang on too hard and fast to the dream of being up there with super-expensive cities like Monaco and Tokyo – but this dream must be let go. Dubai must become a destination of choice for a value-conscious resident. It may not be what the leaders here originally envisioned, but quite honestly it is the only choice in a city devoid of natural allure and natural resources. Comfort in numbers it seems. Those numbers will be met by the sub-continental ex-pat dreaming of a better life in a nearby destination. Dubai fits the bill.

Abu Dhabi has always been a key factor in the future of the GCC. Its own ambitions and development, from cultural landmarks to eco-friendly cities, Abu Dhabi’s leaders have learnt lessons from Dubai’s experience and taken on a very different tone. The truth is that Dubai may well have forfeited its status as the financial-hub of choice, but the impressive work elsewhere (not so much those islands that ironically sank Dubai’s reputation as they themselves sank back into the waters from which they were reclaimed) will ensure it remains a city of choice for those seeking a decent quality of life or even those wanting to work in Abu Dhabi.

New developments in Abu Dhabi (indeed the development location of its own financial hub) present only a 45min drive away from parts of Dubai. A very viable outlook is that the two cities will grow closer together both geographically and politically after a period where their paths seemed to be increasingly diverging.

As with any period of change, there will be some friction ahead – ultimately though, the UAE will have two liveable destinations working hand-in-hand (or closer at least) and offering quite different choices for quite different populations.

Friday 27 November 2009

Flatline - Pulling the UAE Plug

So the bluff has been called.

In what will go down in modern Middle Eastern history as either the greatest hand played amidst a political and economic super-class of opponents, or the most disastrous, Dubai has shocked the international investing community by deciding (officially they “asked” but when there is no other choice it’s not really a question is it?) to postpone the debt re-financing and re-payments at Dubai World, the owner of Nakheel which had a $4bn bond coming due on December 14th. The immediate fall-out has been predictably ugly – CDS spreads for Dubai rose 36%, DP World +50% and the regional fall-out was hard as well, with Saudi CDSs rising 21% and even Abu Dhabi risk doubling straight after the announcement from 90bps to 180bps.

Doubtless there will be plenty of mud slinging amidst equal amounts of pontification taking place in the next few days, exacerbated by the ample opportunity for discussions due to the Eid holidays. A most cynical (or cunningly planned) timing of announcement – many local brokers, fund managers and investors were either already on holiday or literally walking out of the office when the unexpected announcement flashed across the Bloomberg screens. The lack of direction and explanation available to the international community even as the mushroom cloud was still rising following the explosive statement must have been remarkably infuriating for those that had begun to believe the dulcet tones of Dubai’s authorities in the last few weeks.

Rather than even beginning to attempt to explain what might be going through the heads of the politically motivated leaders and decision-makers throughout the region, a more useful exercise would be to immediately jump to what the long-term conclusions will be: one possible outcome is a total breakdown in relations between the region and the international financial community, resulting in a major set-back for the region’s attempts to develop their way towards sustainable growth and economic development over the next 10 years. With nerves already frayed by a soul-destroying temporary failure of capitalism in the most transparent of markets (US), patience and forgiveness is not an easily stumbled upon commodity by those controlling and unfortunately losing the money.

The other conclusion you might argue: this is a fantastically good event for the region. Not only do we rid ourselves of any misunderstandings now between Abu Dhabi and Dubai, but also between Dubai and the entire GCC. This is the band-aid being ripped off the wound in one sharply painful moment that honestly should have been done over 12 months ago. The drip-drip of assistance to Dubai has actually been detrimental to its overall economic health – akin to keeping a terminally ill patient alive by constantly reviving them with the smallest amount of intervention possible, enough to get a faint pulse on the screen.

Allowing a flatline, no matter how brief, may kick-start a more organic and lastingly powerful recovery. The new regime put in place across Dubai in the last week will use the Eid holidays as a breakwater, distancing themselves from the previous managements’ efforts at rehabilitation that have now been blown-out-of-the-water and exposed as nothing but empty rhetoric, seeking a fresh, long-term and confidence-inspiring solution.

One thing is certain I believe - Dubai will survive.

I wrote (original article below) attempting to explain in the most subtle way possible the complexities of what was taking place in the last few weeks, even as Dubai was doing its best to project an image of stability and absolute closeness to its neighbouring cities. The ruler of Dubai even asked those that doubted the viability of Dubai and its links with Abu Dhabi in particular to “shut-up”.

Well, I’m afraid you won’t be able to keep-shut the mouths of the shell-shocked international investment community any longer Sheikh.

Eid Mubarak to you all!


From: Kobrossi, Hani [ICG-MKTS]
Sent: Monday, November 09, 2009 2:10 PM
Subject: ** Poker Faced ** Monday 9th November

** Poker Faced ** Monday 9th November

Mid-East (only for fun) Gamble…
Lady-luck is a strikingly important figure in the game of poker – a favourite pastime of business-leaders, investment-banking-titans and even those that apparently never gamble but “just play for money with friends”. Anyone that has positioned themselves at a coveted seat of a major-stakes poker game and taken the time and pleasure in attempting to work on a special strategy or other motive towards making money will have no doubt realised, after a certain agonizing stint, that they are not indeed the major player originally anticipated and in fact the all-important sucker at the table – there’s always one. Spent longer than 15 minutes and still looking around trying to get a “feel” for the table? Well, too late buddy – everyone’s well on their way of feeling their way right up your trouser pocket to your wad of cash.

A game of poker is being played throughout the Middle East right now. Indeed, the first hand of the game was dealt about a year ago, as certain GCC states began to understand the disastrous consequences of an insatiable appetite for cheap money backfiring spectacularly as it disappeared as quickly as it had been gleefully handed out. There is a great deal of exquisitely positioned bluffing taking place between local and international entities, governments and powerful multi-nationals, governments and other (neighbouring) governments – culminating in an intriguing release of sound-bites often contradicting one another but nonetheless providing ample material for investors and pundits alike.

Bluffing, a most human of human evolutionary traits is an essential aspect of this clever game of poker. Wheeling and dealing with the others is a strategic and calculated play on seeking to profit from what you might be holding in your hands combined with an analysis of the facial ticks and expressions of your opponents. Very much like dealing/negotiating with your “opponents” sat across the re-financing discussion table.

The most alluring aspect of the game of poker? That would be the fact that there are no partnerships or collaborations, it really is a game of every-man-for-himself. The stakes are very high, but is there an ace hiding up someone’s sleeve?

Thursday 19 November 2009

Don’t Double-Dip the Chip

Everyone knows it is an unwritten rule of social etiquette that you never ever double-dip your nacho chip in a bowl of salsa/guacamole/hummus when at a public event. Anyone caught even attempting to carry out such an audacious and inconsiderate act is almost immediately ostracised and surely shunned at future events and gatherings. What do we make then of Obama’s declaration, in a very public forum, that the US is likely to suffer the indignation a double-dip of its own – was he simply covering for the worst or preparing for the inevitable?

Whatever the reason, and without looking too far into the “in-between-the-line” domestic political aspect of the declaration, the recent increase in US unemployment to 10.2% has certainly shocked the public and some policy-makers. Although we have argued that lagging indicators can often prove less useful than even simply anecdotal evidence when playing the markets, the psychological impact on the ongoing fiscal effort across the US political spectrum (National Debt vs GDP tantalisingly close to 100% now) has led to calls for greater action on stimulus spending at the same time as greater control on deficit creation – a tough job made tougher by downwards pressure on a currency that still (just about) acts as the world’s reserve currency of choice, and some growingly impatient creditors. It was no coincidence Obama broached the subject after a 3-day trip visiting his bankers, ahhmm - I mean the Chinese.

Japan is in Asia too…
Whilst all eyes have been on Obama’s visit to China this week as part of his first official trip across Asia, we must not forget the importance of Japan in the region and the long-standing relationship the world’s two largest economies (for now) share dating back post the second world war. Earlier this year, Hilary Clinton made one of her first stops in Tokyo, a sign of the strategic importance the economic power in the region holds for the US – especially with the rapidly rising strength (in all senses of the word) of the world’s former factory. Japan’s role, in both the global-economy and politics, is likely now more important than ever.

It is easy to forget that Japan is still the world’s second-largest holder of US$ denominated-assets, what with all the recent focus on China China China. The sharp and sudden appreciation of the Yen vs the US$ since July this year (+9%) catching a number of export-dependent Japanese firms off-guard after a period of Yen weakness stretching across almost 3yrs (the currency range-traded USD:JPY 110-120 from 2005-208) Estimates place a figure of a still mighty $1.6trn in exposure to US$ assets. Even though the symbolism of Obama carrying his own umbrella as he stepped off the plane in Beijing was designed to strike a memorable image for those Chinese more accustomed to watching their pampered leaders, the inclusion of a number of symbolic meetings on his first stop in Tokyo expressed how sensitive and difficult the balance is between maintaining the cosy relationship with Japan and increasingly flirting with China. Some quite vocal protests were staged by the Japanese at the proposed move of US troops hereto stationed on an island – for a pacifist and normally non-confrontational people this was quite an eye-opener.

The pressure that Obama surely encountered from his Chinese hosts must have had some impact on his temperament whilst walking around the majestic and ancient ruins he visited. His choice of words when discussing the dangers of running such a large deficit and mentioning that double-dip indubitably moulded by conversations held throughout the three-day trip where Chinese decision-makers would have been keen to convey their “concern” over the negative consequences of a dramatic weakening of the US$. It is still very early in the relationship between these two to call any shift in influence – but observers will definitely consider the relatively muted comments from the US President as not only a sign of his grasp of political subtlety, but also the beginning of a new general tone in their dealings.

On the markets, we’ve had a bit of a stutter in Asia during this week, with mixed performance between the larger indices there: HSI -90bps in last 3 days, CSI +45bps and the likes of Vietnam and Indonesia remaining at lofty YTD returns (+78% & 83% respectively) even as some money is reportedly coming back off the table as we near the end-of-the-year. Despite India’s excessive spending on Gold over the last month, the Sensex there has managed to recover from a bit of blip at the start of November (+8.4% and is back near its highest level in 18mths. Middle Eastern markets have seen a strong degree of interest in perennial laggard Qatar (finally!) with the DSM there appreciating 6.3% in 3 sessions. European bourses are off about 30bps today after a slow and sticky US overnight, but still positive for the week so far. Gold slightly lower pulling back below $1,140/oz, Oil very actively moving between $79-$81 ostensibly content to hang around what is perceived to be a high-enough level to elicit inflation hears, and the BDIY goes from strength-to-strength, rising +6% today alone – maybe someone decided to buy those “cute rats” as corporate gifts.

So, another busy week in both the markets and geo-political scene, providing ample ammunition for pundits to create their own outlandish conclusions to fit their requirements. We are nearing the end of what has been a fairly resilient period in the markets, and today already the first of what will be too many e-mails have appeared with predictions for 2010. Let’s first try to get through December and deal with a number of investment managers closing their books before considering another 365 days of market minefields.

As for that Obama umbrella moment again, maybe he really had no choice but to hold it aloft himself with secret service refusing to pay their boss any attention after catching him double-dipping his chip in the communal AirForce one salsa bowl.

Tuesday 17 November 2009

Hippos go shopping

Golden performance…
Even more impressive than that rare footage of a bunch of protective hippos devouring an aggressively arrogant crocodile attempting to cross a pond across their backs is that markets continue to rise with many of the majors hitting new highs for the year. China and the US continue to pretend to want to be best-friends as their respective Presidents meet and gently-greet, Iran consistently “remembers” a nuclear site or two it had misplaced when the IAEA visited, Bernanke creates volatility for the US$ as he admits the jobless rate remains an issue large enough to see interest rates remain at their low-levels for a little while longer and a revelation by Buffet that he has invested in the world’s strongest brands (are we really surprised?) re-confirms the belief held throughout the worst-of-the-crisis that those with cash will (and indeed did) pick the best-of-the-bunch and profit handsomely going forwards.

As long as the global economy does not actually collapse that is. Doomsayers out there will no doubt be clinging on to a few reports of a growing “cyber-war” between a handful of nations as their fuel to fire-up more potential “return-to-barter” scenarios. In these still freshly uncertain times (not everyone is fooled by the recent sense of comfort) it can’t hurt to ride the rise of Gold just in case, as surely many must be now thinking when you remember some of the sniggering (you know who you are) when it was first suggested the spot price would be anywhere near $1,250/oz.

Well who’s considering melting down that gold-plated graduation present from their great aunt now huh? Cable is at 1.68, the Baltic Dry Index is up for the 34th day out of 36, Oil remains around the $80/brl level and the risk-trade is still on. The more that changes, the more things stay the same it seems.

Shopping your way-out…
A lot of media over the weekend kept a close eye on the run-up to the all-important shopping season, what with both Thanksgiving in the US and then Christmas round the corner. “Black Friday”, the single busiest shopping day of the year in the US is a traditional barometer for how the entire season’s shopping spend will pan-out. The large US stores go out of their way (which is more than can be said for some of the more persistent shoppers protecting their bargain finds) in providing tantalisingly attractive offers and enticing a greater US$ spend than normal.

This year, Black Friday will be an extremely expressive test of the US consumer. Last year the crisis was still so fresh and being lived through that a dampening sense of shock may have prevailed. 365 shopping days later and although the markets are looking stronger, the “real” economy we keep hearing about has been dragged through the dregs of despair and credit-card companies are no longer the generous Santas with sacks of cash but more Grinch-like collectors this festive season. Focusing on the actual top-line numbers will be a good indicator of consumer confidence and the general prevailing mood across the US.

Sticking with the shopping theme, only 5 weeks to go till Christmas itself and judging by the volume of seasonal advertisements and festive atmosphere in cities like London, both retailers and presumably authorities are keen to tap-into the “feel-good” factor that these few weeks bring. Shops and restaurants alike will be anticipating sharp increases in average spend as endless lunches, dinners and simply group outings add to the ringing of the tills – the imbibing of copious amounts of (highly profitable) alcohol nicely helping that merry feel develop.

Message for the hippos…
Attempting to alter behaviour through mass messaging is not a new thing of course. When coupled with the excuse that “it’s Christmas time” which wraps (pun) the entire commercial game into one big acceptable gift, most consumers normally cynical to the endless excuses for holiday shopping (who really needs Valentines apart from the romantically whipped and Red Rose sellers?) alleviate any tightening of their belts and let loose on otherwise useless items like, oh I don’t know…singing rats – for example.

In a large, exciting and cosmopolitan city like London, the seasonal euphoria is easily spread through suggestive and endless advertising, creating a widespread and powerful community excuse to bask in the glory of paid-for Christmas lights and actually spend some of the cash the government has desperately tried sticking in their pockets.

Spare a thought for that Crocodile, as anyone will sympathise during these busy shopping weeks (especially Black Friday) that has ventured to wade-through an entire lake of closely-huddled-and-protective hippos, sorry, I mean shopping mothers, only to unfortunately get caught by one and then devoured by the collective bunch.

Not a lot to give “thanks” for in that case and often a true nightmare before Christmas.

Wednesday 11 November 2009

Lucky Rat

Who’s interest rate is it anyway?
APEC – will this prove to be the most important recurring conference over the next 25yrs as the US and China grapple with changes to global power and influence, decide on how to carve-up the strategically important and (increasingly depleting) natural resources still to be found across the globe, and decide on which of the rules to live by as discussed by capitalists and entrepreneurial-socialists. Obama is centring his first official trip to Asia around the Asia-Pacific Economic Cooperation summit being held in Singapore over the next few days, bringing together some of the fastest growing nations sitting face-to-face with some of those rapidly declining (ouch). The most crucial aspect to watch here is how much resistance to China’s growing sphere of influence America conveys whilst treading the fine line on economic co-operation.

Back in the US, just when Bernanke thought it was safe to dip his toe back in those shark-infested congressional waters, a seismic shift in monetary control and influence is up for discussion with congress looking to remove some of the influence the FED wields on important economic tools such as the all-important setting of interest rates. The argument for a depressing admission that market forces and independence from overly bureaucratic and political control no longer provides the best conduit for creating a stable and effective economic environment will no doubt re-surface as howls of objection mount and amplify.

Markets took all this political gesturing in their stride yesterday – just as they have become quite accustomed to ignoring plenty of what surrounds their casino-like activity. Being a trader in these markets is still providing overly-proportioned gains. There’s been a lot of talk about the new risk-trade that has been put on, with oil still bobbing above and below $80/brl (slightly below at $78.7/brl right now), recent weakness in the US$ following a (strangely delayed) recognition of the attractive carry-trade (Cable at 1.675, Eur/$ 1.50) of borrowing at US$ interest rates (0.25% officially) and investing abroad in much higher yielding assets – are we creating another mini-bubble? – even our favourite doom-and-gloom indicator the Baltic-Dry-Index has witnessed a magnificent revival in the last month, rising 23% as confidence builds in emerging markets catalysing the next big “new” thing, allowing all that spare shipping capacity to find a use. Remember that incredible picture of dormant container ships? Not something we want to see for much longer.

Rats saving the ships…
Talking of shipping, an incredibly fortunate craze may be the perfect medicine to the world’s trade-ills. There’s been a recent focus on “lucky” events, and the inventor of this year’s latest “must-have-Xmas-toy” is one of the biggest beneficiaries of this most desirable quirk of fate. So what is the source of heightened excitement and anticipation amongst children this Xmas? Is it a well-constructed and entertaining device that educates as well? Nope. How about an incredibly innovative puzzle? Try again. A company in middle-America (of course producing the goods in China) has been selling irritatingly-cute-cuddly-toys based on…Rats. Yep, I know, cute Rats? Go figure.

Apparently they blurt-out “adorable” catchphrases. The toy makers’ revenues are expected to increase from $1m/annum till mid-year 2009 to over $400m by the end of 2010. That’s quite an impressive percentage increase. Shame they’re so small that only a couple of containers are probably required to ship an entire annual supply. Someone out there hit on the next “hot” idea in the form of some lightweight, easily produced but absolutely humongous object that will give those ships something to do.

Talk about lucky. How about a software firm hitting on the biggest-selling game of all time and forecasting almost three quarters of its annual revenues from that one release? Never mind that the console game, Call Of Duty 2, is based on war and destruction, people just can’t get enough of it. Where in the past (the very past past that is, like hundreds of years back) these occurrences were often left to “divine intervention” with famous battles (such as that of Agincourt in 1415) left at the mercy of God’s decision to provide a resounding victory by small armies against far superior forces, nowadays we seek to quantify these strangely fortunate events. The truth is, as even the inventor of those rats concedes, “no one can really explain why this happened”.

The point to the above? A lot in life can be planned, strategised, researched and highly controlled – but at the end of the day, no matter how much preparation, consistency and regulation you impose on a business (or your life) almost 99% is left to randomness – or what is these days known as luck. The markets can provide an equally frustrating reflection of life’s such quirks. Spent a fortune on an algorithmic programme only to find it stumble when most needed (shame), or how about spending endless hours conducting due diligence on a trade but being felled with an “unseen” event? Quirks.

Even when an incredible stroke of luck occurs for some, there is usually some unwritten rule that another must suffer. Rather like a loser existing for every winner in the markets. Take the equally wonderful and heart-breaking story of recent record lottery-winners in the UK. A group of seven syndicate members are currently celebrating their share of $75m. Spare a though for Mr No. 8 though. Until only a few weeks back he had been part of this long-running syndicate but had to pull-out when faced with a squeeze on his finances.

Lucky for some, not so lucky for one. Rats!

Monday 9 November 2009

Poker Faced

Twenty years is a long time: a good wine can mature beautifully in that time; babies grow into university-dwelling young adults and once sought after cars disappointingly turn into useless rust-buckets. The twentieth anniversary of the fall-of-a-wall in Berlin is simultaneously a reminder of how significant a change for Europe the 1989 occasion was, and how little has actually improved for those previously on the eastern side of the wall despite the best efforts of a unified Germany – and much of the international community for that matter.

Obama has been too busy getting his healthcare bill passed at home (mabrouk) to spend any time visiting the unfortunate scene of a military base massacre - leading to unfair accusations of not caring enough about the troops blah blah – any excuse amongst those still hostile to his now 12-mth old election win - or to jump on a plane with Hilary to visit Berlin in recognition of those 20yrs – maybe he just doesn’t really like the notion of being stuck on a 10hr plane ride with Hilary – can you blame him?

As markets recover from the disappointing employment numbers out of the US on Friday, Asia and Europe put in a good start to the week (up about 100bps on the major indices) despite a number of managers clearly winding down towards the end of the penultimate month. In the corporate world, Kraft has gone hostile – no more nice and sweet anymore but fangs out and ready to bite into (sorry!) the soft and sugary Cadbury’s shareholders with a proper bid with a little nudge from the UK takeover panel “put or shut-up” rule. This potential merger/takeover is a perfect example of a strong, corporate-bond-market-tapping entity seeking to expand its operations with a suitably mid-level emerging market operator. If it works, many more will follow across a number of industries.

Mid-East (only for fun) Gamble…
Lady-luck is a strikingly important figure in the game of poker – a favourite pastime of business-leaders, investment-banking-titans and even those that apparently never gamble but “just play for money with friends”. Anyone that has positioned themselves at a coveted seat of a major-stakes poker game and taken the time and pleasure in attempting to work on a special strategy or other motive towards making money will have no doubt realised, after a certain agonizing stint, that they are not indeed the major player originally anticipated and in fact the all-important sucker at the table – there’s always one. Spent longer than 15 minutes and still looking around trying to get a “feel” for the table? Well, too late buddy – everyone’s well on their way of feeling their way right up your trouser pocket to your wad of cash.

A game of poker is being played throughout the Middle East right now. Indeed, the first hand of the game was dealt about a year ago, as certain GCC states began to understand the disastrous consequences of an insatiable appetite for cheap money backfiring spectacularly as it disappeared as quickly as it had been gleefully handed out. There is a great deal of exquisitely positioned bluffing taking place between local and international entities, governments and powerful multi-nationals, governments and other (neighbouring) governments – culminating in an intriguing release of sound-bites often contradicting one another but nonetheless providing ample material for investors and pundits alike.

Bluffing, a most human of human evolutionary traits is an essential aspect of this clever game of poker. Wheeling and dealing with the others is a strategic and calculated play on seeking to profit from what you might be holding in your hands combined with an analysis of the facial ticks and expressions of your opponents. Very much like dealing/negotiating with your “opponents” sat across the re-financing discussion table.

The most alluring aspect of the game of poker? That would be the fact that there are no partnerships or collaborations, it really is a game of every-man-for-himself. The stakes are very high, but is there an ace hiding up someone’s sleeve?

Thursday 5 November 2009

Direction of Travel

Jitters across the financial markets continue to create severe fluctuations across the majors – providing a great opportunity for traders and plenty of room for pundits like Roubini to peddle their next theory of financial meltdown, but there are rays of sunshine if you hold true to the emerging markets and consider where all the liquidity is going to go.

Anecdotal evidence comes in many shapes and forms and through various conduits. Not exactly sure why this particular trend has all of a sudden appeared in the last few days but in the course of a few conversations a noticeable increase in scrutiny surrounding Gulf airlines and their excellent work in linking the western world with the east strongly evident. Now, it is no great secret that the path from east to west is a growing and strategically important one, and has historically been, but recent emphasis on growth especially has brought a number of hitherto obtuse observations into sharper focus. Bare with me whilst we investigate some of the more “out-of-the-box” implications on the regional emerging market this visionary construction of dominating and versatile airlines may bring.

Fasten your seat belts…
Flying around the region and the Far East in particular, I can understand why you would want to be staying in the Doha premium terminal for longer than necessary. Some may even be tempted to check-in not just for the flight but for the night! Luxury in airports is not a wide-spread phenomenon in the western world, but with Hong Kong, Shanghai and Beijing airports routinely voted amongst the world’s best – Asia is not a stranger to warmly welcoming travellers. Dubai’s latest Emirates terminal is an example of how one can learn from experience and implement meaningful and elegant changes. How much emphasis can one place on the importance of luxury-reclining-leather-lined-seats and free (spiced to perfection) Bloody Mary’s though – are we ignoring a sly indicator of a shift in economic power or reading too much into the in-flight magazine?

With some simple research, passenger traffic numbers indicate an eye-opening trend. The world’s top 3 busiest airports are all still in the western hemisphere – Atlanta, Chicago and Heathrow taking the top spots with 90m, 69m and 67m passengers per annum (PAX) respectively** This is understandable given the more affluent populations living within these regions and the developed level of low-cost and domestic airline travel that takes place across the US in particular. Heathrow may be the world’s third busiest, but until its over-budget Terminal 5 was completed (aesthetically very impressive) it was little more than a dingy bus depot.

The two most intriguing entrants on the list though speak volumes of the trend we are witnessing in growth of disposable incomes and general economic growth rates. Although the highest placed Asian airport is still in Tokyo (Haneda 4th in the list with 65m PAX – the large Japanese population are very rich and enjoy travelling more often than others), Beijing rose by a hugely visible 18% in a year to make its way into the top ten on the list (8th at 55m PAX), and the highest rated Middle Eastern airport (the only one in the top 30 in fact) is of course Dubai. These big jumps are a symptom of the growing wealth of the developing world.

Clear skies ahead…
So what can we reasonably derive from such figures? Well, the usual spouting of “wisdom” about the shift of global power and influence from west to east is slightly clich├ęd, the decoupling theory has wobbled enough to almost look silly (but not having fallen flat on its face – just) and the normal story of one-billion-new-consumers is a long way off when you remember that 80% of China’s population are living on less income per annum than what a ticket from New York to Los Angeles on a low-cost airline would set you back. Better to focus on the slightly smaller in scale but far more fascinating trend that the likes of Emirates, Qatar Airways and Etihad are latching onto in a big way. It is a sign of the shift in entrepreneurial flair some might suggest.

Dubai’s greatest achievement in the eyes of the more intuitive is not its ability to attract package-tourists, whacked-up architects and fortune-chasing dreamers, but the creation of a significant and meaningful portal of access to destinations considered too remote and unprofitable for traditional western airlines. Stronger cultural ties and similarities make for a more natural linkage between the Middle East and such destinations – an organic advantage being exploited with serious intent. Call it foresight, an-engine-stroke of genius or sheer luck, but tapping into the world’s growing and increasingly wealthily mobile population will be proven and looked back-upon as the single most influential spark of entrepreneurialism in the region.

Emirates and increasingly its neighbouring (very high-class) airlines as mentioned above, has put more than just Dubai on the map. Fancy flying to Trivandrum or Cochin? Yes? Well you can now, and easily from Dubai (or from anywhere else via Dubai for that matter) acting upon a whim to spend a long weekend in some of the most luxuriously remote (and value for money offering) resorts in the state of Kerala in India is as easy as clicking on the website link. Never heard of them? Google them.

These Gulf airlines are exclusively cornering a smart market. Rich westerners wanting to travel to the emerging markets in Asia are quite poorly covered by other airlines. In doing so, they are creating a self-fulfilling prophecy of what makes a successful hub. More than that, they are placing their own names on the map through their levels of service and the huge marketing exposure the airline business offers.

Anyone recently travelling through Dubai will have been looking forward to the vast new Emirates terminal. It was once described right here as gleaming and empty. This must now be corrected. It is still gleaming mind you, but it was heaving with people – and that was at 7am. Reliable reports of equally large crowds were witnessed at 1am. Try finding a seat in the huge lounges (which I once thought were way over-optimistic in size and would never be fully utilised) and the look of pleasure on the seated passengers’ faces as they stare knowingly back at you would have you believe they just won the super-car available in the raffle down in Duty Free.

Forget about the choice of chicken or beef with the in-flight meal. The smart money is going to be choosing between biryani or bean-sprout noodles.

Tuesday 3 November 2009

Dazed & Confused at 20,000

Plenty of profit-taking in the markets in the last few days ahead of big economic releases this week (Australia already increasing rates again, FOMC release on Wednesday) and having been on the road with our Global Strategist plenty of reflection from around the region to decipher,

As lovely as Doha is, it’s never the most exciting place in the world. I don’t think the Qataris would mind this description as they consciously avoid the attractions Dubai often craves, preferring to remain selective in their events and maintain top-notch organisation and execution of entertainment promotions, like Abu Dhabi. The Tribeca film festival held in Doha last week saw stars the likes of Ben Kingsley and Martin Scorsese grace the often placid streets of the village-like city. As the rich and famous were strolling around outside, inside the buildings housing the Qatari investment community we wondered what types of returns these stars’ vast earning-power were enjoying for the year, slightly jealous of their supposed recession-proof movie industry. The amounts they were being paid to be in Doha for several days was surely providing some help to whatever gains had been achieved.

Trade don’t analyse…
We all know markets can act quite independently of surrounding macro economic factors, but what if really surrounding macro economic factors have decided to act independently of markets? This conundrum appears to be confusing more than its fair share of normally hard-headed investors. A sense of “who knows what will happen” prevails across a number of normally smug investment managers across the region (and beyond), concerned that there is too much unpredictability within the stimulus framework that we all now live within. The big questions are when will the stimulus efforts come to an end (or have to end when the spending simply becomes too much to handle - the US is close to surpassing 100% of national debt/GDP for the first time, and it’s mostly held by foreigners unlike Japan’s 230% ratio which is not that dangerous when you remember it’s all held by Japanese – basically they owe themselves a lot of money), and sprinkled with even more uncertainty is what happens to markets and the underlying economy when the end does arrive. This uncertainty means the next diversion in policy will be the setting of interest rates, leaving open the possibility of the “last war” being fought on this ground in a bid to insulate.
Traders are getting it right at the moment, understanding the benefit of increasing earnings expectations and earnings gains at absolute levels (from incredibly low floors) leading to share-price gains. It’s the traders that have been making money since markets started their strong-run back in March – rises of 50% across the developed majors. The fundamental analysts are the ones having trouble coming-to-terms with what is happening around us, preferring to focus on lagging indicators (such as unemployment numbers and lingering on the bottom-line) and running the risk of being over-taken in the traders’ brand-new (bear-market rally financed) Ferraris – in red of course.

Calling 20,000
Let’s get controversial for a moment and stick our necks out with a number – if it was suggested that within the next 18 months the Dow Jones would test the 20,000 level how would you react? Well after picking yourself up off the floor and re-reading what was just written – yep, it said 20,000, that’s T-w-e-n-t-y T-h-o-u-s-a-n-d – and overcoming the initial instinct to either laugh or cry out of disbelief, taking into account the short-sharp rallies before a relapse into recession as in the past depression of the 30s, the possibility is not all that far-fetched. It boils down to whether you believe top-line growth is enough to create a strong buy conviction. It further boils down to how long you can convince the investing community that relative versus absolute is the correct way to consider strength of earnings. Hitting a short/medium term high is a possibility. The larger concern is the pain investors will feel if they get burnt again just when they think the coast is clear. It’s that human emotion of dealing with a nasty rejection once more – if you have a bad experience in a relationship, it takes you longer (and takes much more effort of confidence for most) to get back out there into the game, but you do venture out once more. The real slug-in-the-gut is when it happens again. The next time you are going to expose yourself to such disappointment increases exponentially in length – markets may remain depressed for a while if we experience a short-term high.

Merging the Emerging…
A couple of things are clear across the board. The huge levels of liquidity flowing out of central banks (but not into the hands of mortgage consumers - so far) has had no choice but to find its way into some decent returning assets and investment instruments – essentially creating the start of what may eventually turn out to be a bunch of small “bubbles” - if not carefully monitored. However, with global confidence and the general economic situation still quite unstable, the low floor from which these investments have risen will ensure it will be a while before the blowing of any bubble. The first obvious beneficiary has been emerging markets (more below). Corporate spreads (amongst quality names) have also narrowed with large inflows and the commodity play/treasury rise/US$ safe haven has been working since the start of the crisis back in 2008. The strength of emerging markets (all providing incredible looking returns this year so far, Peru +118%, Brazil +114%, Russian +110%, Indonesia +103%, Argentina +80%, China +80% to name but a few) was touted some time before the bear-market rally. Memories of the “death of the BRICs” have been laid to rest, and some of the more vocal pundits declaring the (still not totally proven) theory of “decoupling” as a pathetically optimistic hope, left slightly red-faced. Reading back on some commentaries (here especially) it was strongly favoured that the Asia economies would be the first to pull the investment community out of its rut, and whilst the exporting Asian economies still rely heavily on US and European consumers, the rise of the domestic Chinese buyer (all that talk of 1bn consumers never sounds boring) and increasing Asian wealth in general making for an appealing story.

Would central banks, having finally learnt from past experiences - not to mention some increased public scrutiny - start leaning harder and faster against asset bubbles at the slightest indication of one? This is a much larger debate than what markets will do over the next 12mths, leaning into territory dealing with capitalist versus market-controlled policies. Preventing those smart enough to understand there is a new opportunity from profiting off those apparently not smart enough (who inevitably pay over the odds (a la tech bubble for example) is detrimental to “creative destruction”. Where there might be a great argument for preventing such over-peddling of toxic and extremely risky assets such as CDOs, how can you stifle entrepreneurial creativity by removing from the outset the incentive of huge profit generation on the back of a smart idea? Most out there believe there will be a new “new thing”. As with past downturns, the previous boom drivers always lag in the next boom. Look at tech from 2002-2007 – didn’t do very much after their time in the limelight in the late 90s. Property was the major contributor in 2002-2007, but with the pain so fresh in the memory you can safely bet something else (emerging markets most likely) will enjoy the next 15mins of investor adoration.

The strong get to play…
How to play on this? Well, how about taking advantage of the excess liquidity pushing emerging markets higher and the low rates of interest in the US for starters? Borrow from the world’s strongest capitalist market and invest in those emerging into a stronger-looking mix of capitalism and authoritarian control. Or how about tapping into the corporate debt market where rates are attractive (for all the trouble across the US, the corporates are still regarded as well-run and people are willing to lend at rates of around 7-8%) and tapping into the same emerging markets as above through an acquisition of an international firm with a large footprint across the same. As we suggested many times in the past, those with cash, and those with easier access to cash will come out on the back of this period of recession as the strongest players going forwards. Western names with large exposure to the stronger emerging markets are a great attraction right now (like Volkswagen and even luxury goods makers like Louis Vuitton selling like hot-cakes in China and Hong Kong). The top players in each industry have generated large amounts of cash and their quality will allow them to tap yield hungry investors when most needed. Survival of the fittest as the strongest excel. Expect a good deal of consolidation across the healthcare, tech and financial industries (financials will be the last and possibly call the bottom of the market) with the big players buying out the struggling mid-level players starved of cash and with no offer of credit (a bit like Abu Dhabi having fun with Dubai’s assets) - Easy pickings.

So we have mixed anticipations out there amongst the investment community in the Gulf. Some of the more trading orientated have had a great year. The movie-stars enjoying Qatar and Abu Dhabi in the last few days were are also likely having a good time. The only concern is always the unbalancing unknown – as many economies are uncertain how to handle unprecedented circumstances such as the removal of incredible amounts of fiscal/monetary stimulus and the level of tightening that will follow as the inflationary backlash takes hold.
Additionally, not everything beneficial for one is beneficial for all. The 1bn new consumers in China we all love talking about did not prove so attractive for Gillette – their Mach product range (razors and creams) did not prove so useful in a country where hair growth is not a great, uhmm, concern and hence shaving not so necessary. If even a box-office ticket heros like Nicholas Cage can suffer a significant loss at the hands of “unsound financial advice” then happy, double-digit returning financial investors this year have even more to smile about across their bearded faces.

Monday 2 November 2009

Zing Abu Dhabi Zing

Plenty of action in the markets in the last few days, big economic releases this week and having been on the road plenty of reflection from around the region to decipher, full analysis tomorrow – for today though, some observations on the back of a special F1-weekend

Wowaweewah…that’s about the only “word” that leaps to the front-line of an expressive attempt to even begin describing the Abu Dhabi Grand Prix staged over the weekend at the still new-coat-of-paint-smelling, brightly sparkling Yas Marina circuit. From the surreal Yas Marina hotel (half land, half water based – but of course) to the general seating areas around the well-positioned grandstands, an incredibly impressive, well-planned and thoroughly deserving of great applause three days were enjoyed by all, containing big-hitting stars and equally high-frequency-hitting cars – the sheer electricity of what is otherwise known as the modern day “circus” came to town in all its F1 glory and felt as if it had always been here – for anyone that attended it will now be difficult to remember what Abu Dhabi was like before the Grand Prix.

It proved a great opportunity to showcase what determination, ambition and a slightly fortuitous pile of cash can achieve. As with the argument put forward for Qatar’s deserved profits a couple of weeks back though, just because one might be blessed with endless amounts of wealth does not always translate into doing what is best for either your people or your neighbouring region in general (just look at the Sultanate of Brunei and their “spending” – the only ambition there a wish to amass a collection of multi-coloured Rolls-Royces). The effort that went into producing what was showcased to the world over the weekend was of course built through the sweat and tears of international labourers rather than native workers, but the reported working conditions and management style of the bill-payers was highly regarded by all. Even at the event itself, Abu Dhabi residents were widely present to assist with what many other rich-oil producing nation’s residents would have considered mundane tasks (i.e. beneath them) – with extremely helpful and (highly irritable if tipped) courtesy taxi drivers providing free services for some shuttling around the large arena.

The array of buses and shuttles made for a strong showing of organisational thinking and event planning had been spared no expense as the massive crowds were swiftly and effortlessly herded between the incredible racing arena to the jaw-droppingly awesome concert arena – from zinging cars to singing stars at F1 speed. Designers had no doubt been provided with a drawing board akin to a child’s etch-a-sketch only existing in their wildest dreams and told to let loose in a flurry of creativity and imagination – as too often happened in other cities during the boom years, these buildings did not end up ugly expressions of excess, but more so abstract buildings strangely alluring and even beautiful – not an expression you normally hear widely bandied about the Middle East.

So what does it mean that Abu Dhabi has staged a grand prix? It certainly did not anticipate an economy stimulating effect, I don’t think - the event actually cost an estimated $4bn with all construction considered and other entertainment and organisational factors combined. Even after admission ticket revenue is considered, it seems more likely a current F1 driver’s teenage son will be crowned champion himself before the venue will break-even. The prestige element is of course a priceless reward. Abu Dhabi’s movers-and-shakers are used to mixing it with the high-flying society types and big stars but not usually here in their own backyard. Having such a large number of dignitaries and showbiz personalities all crawling around what is still a very small city for a long weekend provided fleeting glimpses of inspirational (to some) personalities and brought a sense of glamour and glitz worthy of a Mediterranean resort in what had been nothing but barren desert barely a year ago. Bringing to these (artificially sculpted to perfection) shores what had previously only been accessible to those lucky enough to travel the world-in-luxury will be seen by many as a worthy gift to the people that are residing in the region.

We could spend some time analysing the one-upmanship versus Dubai and other GCC states but that would be rather petty and bitter at this stage. We could also ponder the rights and wrongs of spending such large amounts of money on what may really amount to nothing more than a great “show”, or we could even argue the pros and cons of pitting (racing pun intended) Islamic traditions against the very modern backdrop of scantily-clad women that just seem to find their way to such high-profile events. However, more gentlemanly to sing Abu Dhabi’s praises, concentrating and lingering on what was truly a special few days with an atmosphere never before experienced in this part of the world (even at the Bahrain Grand Prix it must be admitted) but one that will remain a very special memory amongst those that took advantage of the opportunity to revel in a fabulous display of the 21st Century’s entertainment answer to the Roman Coliseum.

Remarkable was it? As sure as a Ferrari should be bought in red it was.