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Do you feel that Gold will continue on an upswing in 2010?

Date : 19/01/2010
Author:  Markaz Analyst Club

Or will economic recovery in the US and a strengthening Dollar lead to Gold falling out of favor with investors?
 
Gold has traditionally been used as a hedging device against a weakening US Dollar, low interest rates and inflationary fears. These conditions prevailed in 2009, leading Gold to reach a record high of USD1,227.50. Additionally, the Reserve Bank of India announced a purchase of 200 ton of Bullion from the IMF, a symbol to the lack of confidence in the greenback. Gold, which typically moves inversely to the dollar, rose 24% last year as the dollar fell 4.2%. Analysts predict that the price may reach another all-time high this year. Analysts surveyed by the London Bullion Market Association said that in 2010, gold will average USD1,199, up 23% from last year, according to the average forecast in a survey of 26 traders and analysts.
 
As global economic and market conditions continued to be murky and unstable, Gold saw a spectacular rise in popularity, gaining 10% in November alone to close out the year with a 24% annual gain versus 6% for 2008. According to Mr. Raghu Mandagolathur, Head of Research, the sharp rise in gold indicates the cloudy global status in terms of pulling out of recession. In spite of huge fiscal and monetary stimuli being enacted so far, the world is still a place with significant imbalances. Such scenarios lead to a favoring of Gold and other commodities as stores of value or “safe havens” which leads to a direct increase in demand. “The demand side factor is further compounded by aggressive buying by some central banks (e.g. India). On the other hand, supply is constrained. It is estimated that new supply will significantly reduce from 2010 onwards. Recycling from scrap as well as government sales are expected to be muted thus constraining supply further. Strong demand and weak supply is further helped by low interest rates, which are a plus for any commodity investment.” (Mr. Raghu Mandagolathur)
 
However, gold is not an asset class. Prices will tend to come back the moment there is clarity on the global economy. Till then the gold price may sway due to intense speculation. (Mr. Raghu Mandagolathur) Gold is likely to see another year of gains in 2010, but not as “spectacular” as 2009, according to Mr. Roshan Chutkey, who tracks international markets. He cites “considerable uncertainty surrounding USD movement for the year” in addition to a “general consensus that the greenback is in for a long-term depreciation” as propellers of Gold prices gains in the coming year. “Gold has averaged USD950 for 2009 with the current prices hovering around USD1,150; I expect gold to swing between USD1000 and USD1300 for 2010.” (Mr. Raghu Mandagolathur)

-       Compiled and edited by Ms. Layla Al-Ammar, Investment Analyst, Research

The Markaz Analysts Club is an initiative launched by Markaz with an aim to collate the many varied and diverse viewpoints of Markaz analysts in an informal setting in order to share with the public the depth and breadth of analyst knowledge power within Markaz. On a periodical basis, a question concerning the topic/s of the day is posed to our analysts spanning various departments within Markaz (from Real Estate to Oil & Gas to Corporate Finance etc); these analysts’ responses are then compiled into a brief opinion piece for public viewing.

Tags:  Gold, Markaz Analysts Club

Ratings:
 Current rating: 0 (3 ratings)

Do you think that GCC markets present good opportunity for 2010?

Date : 31/12/2009
Author:  Markaz Analyst Club

Will GCC markets recover during 2010?
GCC stock markets have terribly underperformed other markets, both Emerging and Developed, during 2009. The overall MSCI GCC Index gained just 18% against 73% for Emerging markets and 27% for MSCI World. This depressed market activity comes in spite of decent crude oil prices (IPE Brent is up 85% for the year), low inflation (down to 2.5% in 2009 from 11% in 2008) in addition to fairly comfortable fiscal surpluses across the major economies.
 
The question then is; given such underperformance, do GCC markets present a good opportunity for 2010? And are we likely to see a recovery in market performance in 2010?
 
Mr. Ramadoss Venkateshwaran, who specializes in the Real Estate segment, pointed out that the question itself “tempts one to conclude that an upswing rally is due for GCC markets, especially when the region is slowly coming out of internal crises which emerged as a by-product of the global crisis and slowdown.” He notes that what distinguishes frontier markets such as the GCC is in the realm of systemic risks, pointing to events such as Gulf Bank, Saad & Algosaibi and Dubai World as a hallmark for such risks. “Although incidents of such systemic risk events increase during a downturn in all markets, like Lehman Brothers, the lag between the end of a downturn and the end of such incidences is bigger in frontier markets.” He goes on to point out that in the developed world; these events tend to act as precursors to a trough or bottoming out “as the number of such incidences recedes”. However, in frontier markets such as the GCC, such events followed the period in which the IMF and other such agencies had forecasted economic recovery. Consequently, such “risk perceptions have kept prices from rising and I believe that, if the global economy manages to avoid a double dip, as expected by the central consensus forecasts, GCC markets would pose a good upside from current levels as risk perception wanes.” (Mr. Ramadoss Venkateshwaran)
 
Moving from systemic risks in GCC economies to corporate earnings strength, Mr. Amrith Mukkamala (Senior Analyst, Research) notes that 2010 earnings “are not expected to be significantly robust. We are looking at +6 to +8% growth in earnings at a GCC level. The only country which is expected to witness a significant growth in earnings is Kuwait.” Furthermore, given the outflow of foreign money, he expects external liquidity to be neutral. Mr. Raghu Mandagolathur, S.V.P. for Research, notes that “even during good days, market performance can mostly be attributed to local liquidity and speculation rather than foreign investor interest. Foreign investors still view the GCC as a frontier market with serious limitations including lack of corporate governance, information and research. A good run on oil price may bring back some hedge funds that are keen on quick money but it will take fundamental changes at a market microstructure level to get the attention of quality institutional investors.” Moreover, internal liquidity is expected to be tight with negative investor sentiment due to “low corporate disclosures and comparatively poor corporate governance standards. Thus, in absolute terms I would expect a 15-20% return on MSCI GCC in 2010. This would mean a relative underperformance as compared to the other emerging markets. (Mr. Amrith Mukkamala)” Mr. Pradeep Rajagopalan suggests that rather than viewing the GCC markets as a whole, he would view it as a “barbell with some companies doing very well and some companies posting steep declines”, given that in many markets, it is a select number of companies which drive overall market performance, it would be more prudent for investors to take specific calls on undervalued firms, irrespective of country.
 
Nearly all analysts noted healthy crude oil prices as a driver for growth in 2010, with an expectation that crude oil prices will remain in the USD 60-80 range, however, Mr. Amrith Mukkamala, points out that the impact of such a range would be neutral for markets. Mr. Raghu Mandagolathur, agrees, noting that “the issue no longer rests with just oil price” and that the GCC is paying a high price for turning a blind eye to “much needed reforms in virtually every aspect of market functioning.” The current financial crisis has thoroughly exposed the gaps and weak spots throughout the GCC. He notes that “lack of CMA, corporate governance failures, family group defaults, banking failures, real estate meltdown, project cancellations, etc loom so large that a mere normal oil price scenario is just not enough to lift spirits.” Strong crude oil prices will undoubtedly strengthen government coffers; however, “successfully transmitting them down the line will need enormous straightening up on many fronts.”
 
In closing, our analysts believe that recovery will likely be patchy in 2010, Mr. Roshan Chutkey, who tracks international markets, believes that asset managers ought to lower allocation to the GCC in 2010 in favor of other emerging economies, noting that the GCC may provide some 2011 stories, but that he expects the region to be a laggard in 2010 as well. Mr. Raghu Mandagolathur points out that “the reasons why GCC markets underperformed emerging markets in 2009 will still be in force during 2010. Unless oil breaks out to frenzy levels (say above USD150/b), the GCC markets may deliver yet another year of normal returns (defined as anything between 10% to 20%).”

-  Compiled and edited by Ms. Layla Al-Ammar, Investment Analyst, Research
.
The Markaz Analysts Club is an initiative launched by Markaz with an aim to collate the many varied and diverse viewpoints of Markaz analysts in an informal setting in order to share with the public the depth and breadth of analyst knowledge power within Markaz. On a periodical basis, a question concerning the topic/s of the day is posed to our analysts spanning various departments within Markaz (from Real Estate to Oil & Gas to Corporate Finance etc); these analysts’ responses are then compiled into a brief opinion piece for public viewing.

Tags:  GCC Markets, Markaz Analysts Club

Ratings:
 Current rating: 0 (3 ratings)

Will Dubai be able to redeem its pride as a tourism and financial hub of the GCC?

Date : 27/12/2009
Author:  Markaz Analyst Club


Or do recent events spell the beginning of a long road of decline for the emirate?

Recent events in Dubai not only threw regional and global markets into an, admittedly brief, period of turmoil, but they also raised very justifiable concerns regarding Dubai’s ability to maintain its growth trajectory in addition to furthering its ambitions to be the region’s hub of .. well, everything. Dubai dominated the news in late November with a possible default of Nakheel’s USD 3.5 bn Sukuk, in addition to the danger of this event triggering further defaults within its parent company, Dubai World, which sought a 6 month standstill on debt repayments. Abu Dhabi threw its maverick cousin a last minute USD10 bn lifeline, USD4.1 bn of which was to cover the Nakheel Sukuk, while the remainder was to cover Dubai World costs as it engages creditors in debt restructuring talks. Analysts around the world quite accurately predicted that Abu Dhabi would not let Nakheel default on the Sukuk; however, this did turn analyst’s attention to the debt restructuring of Dubai World which amounts to over USD 25 bn. Given the complexity of Dubai World’s structure, this process is expected to take a fair bit of time to complete.

On the question of whether Dubai will be able to redeem its pride as a tourism and financial hub of the GCC, Markaz analysts, by and large, have no doubt that the emirate will be able to recoup its position as the GCC hub, the question then becomes not one of “will it happen?”, but “when will it happen?”

Given that the emirate has spent the better part of the last decade aggressively building the infrastructure and regulatory environment needed to transform itself, far outpacing any other country in the gulf, it will remain, at the very least, the GCC’s tourism hub given that “there are no other alternatives so far and it will take a long time and lots of money for anybody else to build the requisite infrastructure” (Mr. Rajiv Bishnoi, Asst. VP, Oil & Gas). On the financial side, “Bahrain, Kuwait and Qatar have laid out their ambitions to become the regional financial centre as well, however, they lag behind Dubai considerably in terms of developing the necessary physical and regulatory infrastructure” (Mr. Ramadoss Venkateshwaran, Senior Research Analyst, Real Estate).

According to Mr. Venkateshwaran, the recent debt woes facing the emirate are “a hiccup in its growth path” and may provide opportunities “for others to advance and catch up.” Mr. Bishnoi posits that while it “may take a while – 5-10 years - for Dubai to regain its reputation as a financial hub. Bahrain and Qatar could now make a move to claim the sweet spot of GCC’s Markaz Al-Mali.

Dubai’s infrastructure was brought up by nearly all analysts; there is the perception that Dubai has spent the decade “spinning gold from sand” with “no fundamental economic bases” (Mr. George Kunnumpurathu, Senior Analyst, Corporate Finance), and while it is certainly true that Dubai has no natural resources (read: oil) to fall back on, it does have a resource-rich, more fiscally conservative cousin who has repeatedly stressed that the UAE is one family, thus implying its continued support of the emirate. Mr. Venkateshwaran notes that this restructuring could provide Dubai with an opportunity to plug the gaps in its existing regulatory framework, an example of which are concerns that have been raised regarding the inadequacy of the current insolvency system in the emirate. Mr. Raghu Mandagolathur, Senior Vice President for Research notes that while “Dubai’s ambition to become a financial hub is certainly dented with the current events. Observers could easily see that Dubai was missing the market microstructure that is needed to become a financial hub like London or New York. Given the scale of problems currently on hand, Dubai will definitely be busy putting its house in order for the next couple of years before embarking on ambitious projects.”

Dubai’s ambitions have been blatantly transparent in the last decade; some might argue that this has neared a point of vulgarity in recent years with Dubai’s obsession with having the “largest”, “tallest”, and, in most cases, “most expensive” projects in the region. While many of these have been admirable, such as the Dubai metro and the various “cities” that the emirate has invested in, other projects like The Palm and World Islands have recently been cited with a slight tinge of mockery by regional and international press when reporting on Dubai, thereby highlighting that perhaps the emirate has “bitten off more than it can chew” with its “build and they will come” strategy. Henceforth, Dubai may need to abandon its “old model of “grow come what may”, and may be forced to switch to a “grow with caution” model in order to emerge out of the crisis wiser.” (Mr. Raghu Mandagolathur)

Mr. Bader Asadallah, Assistant Analyst, notes that the “nearly a year and a quarter after the beginning of the global crunch, Dubai’s prices remain high and unattractive even after large declines relative to cities around the world. “ He feels that an argument can be made that “Dubai took advantage of the global crunch, by not supporting the city from day one and allowing it to free-fall till prices reach attractive levels” which would entice foreign investors to return to the emirate. He opines that while “Dubai did not “want” or “plan” for recent events, the emirate may be playing up the debt woes in order to push valuations down to a level which would ultimately attract new investors,” though this would obviously come at the expense of current investors.

Dubai has been, and will likely continue to be, a global focal point and regional/international markets will continue to watch Dubai World developments with interest. The Markaz Analyst Club does not see the Dubai World debt restructuring as “the beginning of the end” for the emirate, however, it is likely to rein in Dubai’s ambitions to more realistic levels for the coming decade.


-       Compiled and edited by Ms. Layla Al-Ammar, Investment Analyst, Research

The Markaz Analysts Club is an initiative launched by Markaz with an aim to collate the many varied and diverse viewpoints of Markaz analysts in an informal setting in order to share with the public the depth and breadth of analyst knowledge power within Markaz. On a periodical basis, a question concerning the topic/s of the day is posed to our analysts spanning various departments within Markaz (from Real Estate to Oil & Gas to Corporate Finance etc), these analysts’ responses are then compiled into a brief opinion piece for public viewing.

Tags:  Dubai, Markaz Analysts Club

Ratings:
 Current rating: 0 (3 ratings)

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