The Gulf has not been in the eye of the global financial storm lately. Oil prices are stable and higher than they were for most of last year, and state and private entities in Dubai are paying their debts more reliably. Still, the storm seems to be blowing more fiercely, and investors in the region can't help but feel some of its effects. Gulf stock markets generally have performed better than others this year, but they have been dragged down in the past few months, as many have, and bourses in the Emirates have displayed particular weakness.
The recent wave of selling began in Greece and radiated outward. An immense fiscal deficit sent interest rates soaring on Greek government debt, which made repayment more problematic, raising rates further in a vicious circle. Combined with the fear that the same was in store for Greece's neighbours along the olive-oil belt, this resulted in a dramatic drop in the euro - from more than Dh5.50 to less than Dh4.50 in about six months - and in European stock markets. The declines accelerated, prompting the European Union in early May to stitch together a rescue plan worth 750 billion (Dh3.33 trillion).
The relief was palpable. The announcement of the plan ignited a rally in global stocks - for all of four days. Concern that there were other shoes to drop - plus-size ones at that - and perhaps the realisation that the bailout amounts only to a transfer of borrowed money from the north to the south and no real reform, meant that the advance was a detour on the path to even lower lows. Euro zone stock markets were recently down more than 20 per cent collectively since the start of 2010.
Dubai's DFM General Index has not fared much better, showing a 16 per cent drop for the year. The ADX General Index in Abu Dhabi was down a milder 8 per cent, but both indices were trading close to their lowest levels in more than a year. Bourses elsewhere in the GCC have been no worse for wear, with indices up about 10 per cent in Saudi Arabia and 3 per cent in Kuwait and little changed in Qatar.
Those results compare with losses of roughly 2 per cent for the S&P 500 stock index and the high single digits or low double digits for many markets in the developing world. The steep decline in Dubai is largely a case of guilt by association. The shaky finances in southern Europe tend to encourage investors to shun other places with iffy histories of debt repayment. "Any sense of risk aversion will hurt countries perceived to have financial difficulties," says Komal Sri-Kumar, the chief global strategist at TCW Group, a subsidiary of the French bank Société Générale.
Dubai became the focal point of worldwide angst late last year, after Dubai World announced that it was suspending payments on debt of more than US$20bn (Dh95.5bn). This time around, by contrast, conditions have been quite benign. In fact, as problems in Europe intensified, Dubai World reached an agreement with a majority of its creditors to restructure its debt. Developments in Europe could have a more material impact on Gulf economies, investment advisers say. The depressed euro raises the prices that European consumers must pay for Gulf exports, and that goes for one export in particular - oil.
Oil prices have fallen in line with the euro, apparently on expectations that weakness in the currency and in European economies will curb demand in the region or have an indirect effect on it by derailing the fragile recovery in the US and elsewhere. During May, the near-month futures contract for light, sweet crude fell from just under $90 a barrel to about $67 before rebounding into the mid-$70s.
But if economic progress in the Gulf, much like credit conditions, depends on events far away, there has been little harm done so far. "Economic growth in the Middle East has generally been holding up," says Mr Sri-Kumar. The same goes for corporate profits. Companies based in the GCC earned 40 per cent more in the first quarter of this year than in the same period last year, according to press reports, although the gain was a more modest 16 per cent in the UAE.
Nathan Rowader, a manager of the Forward Frontier Markets Fund, says Gulf stock markets haven't been getting credit for that strong growth. "They're trading at valuations that are much lower than developed markets, and yet they have forecast earnings and economic growth that's higher," he says. GCC markets, excluding Saudi Arabia, which is closed to most foreign investors, are valued at about 10 times earnings, he says, while US stocks cost nearly twice as much.
It may not seem fair, but Mr Sri-Kumar warns that Gulf markets are likely to remain in thrall to conditions elsewhere for some time to come. "The big issue is the overall global outlook and the price of oil," he says. "Right now, the oil price is not taking into account a double-dip recession in the United States. If that happens, we can have another $10 to $15 drop in oil." He notes, however, that "even then it would be better than in the past". A year or so ago, oil fell into the mid-$30s.
Jerome Booth, the head of research at Ashmore Investment Management, a firm specialising in emerging markets, is more bullish. He says he is "very constructive on oil" and expects the price to be supported by strength in emerging economies, which have been resilient as mature economies falter. "The response is likely to be infrastructure booms in a number of emerging countries, as well as other construction," Mr Booth says. "Infrastructure is very energy intensive, hence, I am bullish on oil medium term."
Other factors besides oil move Dubai's economy and markets. One of the biggest, real estate, remains weak, limiting the ability of the regional financial system to recover. A recent study by Moody's Investors Service predicted that property prices across the GCC would stay depressed for 12 to 18 months. In the past month, Moody's has downgraded the debt of several Gulf institutions, including Commercial Bank of Dubai, Dubai Bank, Emirates NBD, Commercial Bank of Kuwait and HSBC Bank Middle East.
Farouk Soussa, a Citigroup economist in Dubai, cautions in a recent report that the fall in property prices in Dubai and the lingering high debt levels related to it "have led to a significant fall in investment, which we do not expect to recover in the medium term". But he points out that there is more to Dubai than real estate. "Dubai's non-real estate sector ... accounts for around 75 per cent of the economy," Mr Soussa writes. "This sector is underpinned by competitive advantages, such as Dubai's location and infrastructure, and has the potential to lead a strong recovery in the near term."