Extract from Monthly Investment Newsletter
From: December 2009 NewsletterThe Dubai Factor
Dubai announced in the first week of December that it was investigating the extent to that
a property development company (Nakheel) and its parent holding company (Dubai World) could suspend their debt obligations for six months. The key issue is the repayment of a US$3.52 billion loan on 14 December, part of Dubai World's total debt burden of US$59 billion. The announcement caught the market by surprise and the Credit Default Swap spread on Dubai skyrocketed (although these have since fallen), dragging credit spreads on other governments (e.g. Greece) in its wake.
Share markets around the world were immediately concerned about the extent western banks were involved. The Australian market dropped 2.8% on Friday 27 Nov in response to the Dubai issue with stocks such as Leighton Holdings and ASB rumoured to have exposure to the Dubai, but recovered on trading on the following Monday and Tuesday. The US market dropped slightly but recovered over the week as few US companies have exposure to Dubai. The main impact was seen in the UK share market as some of the major banks, Lloyds and HBSC, have significant exposure to Dubai.
In recent years the extravagant projects created in the United Arab Emirates have been somewhat mind-boggling. The World islands, the Palm project (pictured) and the world's tallest building (the Burj Dubai) are classic cases in point. The fact that these, and may other projects have been heavily reliant on debt (rather than funded by oil revenues) seems to have been overlooked, or at least ignored, by financial markets. However, it also seems clear that other UAE member states, such as Abu Dhabi, will step in to ensure that Dubai does not implode in on itself. Recent news reports suggest that a debt restructuring plan is already underway and share markets in the US, Australia and New Zealand have shrugged off the impact of Dubai.
Economies officially out of recession
Definition of a Recession: Two back to back negative quarter GDP results.
The US economy returned to growth in the third quarter signalling the end of the worst recession in 70 years. The economy expanded 3.5% . Unemployment figures peaked at 10.2% (in December this figure dropped below 10%) with 7 million people having lost their jobs in the Global Financial Crisis in the US alone. Recovery will remain fragile and we are yet to see how the world banks are going to wind back the fiscal stimulus.
The New Zealand economy is out of recession but the next few quarters will be bumpy as the economy slowly converts the rebound into recovery, according to NZIER Principal Economist Shamubeel Eaqub. "There are still significant risks to the economy from renewed over-valuation in the housing market, rising unemployment, persistent external imbalances, rising oil prices and eventual withdrawal of monetary and fiscal stimulus" he said. NZIER’s consensus forecast for 2010 is a subdued 2.6% recovery. They also expect the RBNZ to raise interest rates from the second half of next year towards 5.5% by mid 2011 from 2.5% currently.
The Australian economy didn't officially tip into recession. It had one negative quarter GDP. To curb growth the Australian Reserve Bank has increased interest rates three times this year.
Earlier this year we ran an article in our newsletter "Don't Waste This Crisis". Those clients who had the foresight to add to their savings with both lump sums and regular contributions, have been well rewarded.