For investors in the Middle East, global equities and crude oil, it will be hard to wax nostalgic for 2018 given the sheer scale of the losses this year inflicted. Even I was stunned to see Brent crude plunge to $58 just a week after AMEInfo published my column on November’s collapse in black gold! The autumn of 2018 was all about a Halloween risk spasm on Wall Street, not a Santa Claus bull run!
Emerging markets haemorrhaged money in 2018 in an annus horribilis amplified by a spike in the U.S. dollar, monetary tightening and an exodus of offshore money from Arab financial souks from Casablanca to Muscat. Investors unlucky enough to be invested in Turkey, Pakistan, China, South Africa and even the GCC endured losses in the 30% to 60% range. Crude oil, industrial metals, emerging markets currencies and even UK/UAE real estate endured predictable bloodbaths. One of the few profitable investments in 2018 was a three month U.S. dollar bank deposit tied to the sharply rising LIBOR rate. In fact, it is now possible to get a 3% rate on bank deposits in the UAE, not much less than the net (after service fees) of luxury apartments in Downtown and Burj Khalifa. When markets go ballistic, cash is king (and queen too for gender equality purists!). I have not even considered the 70% massacre in crypto-currencies in 2018, the 21st century’s dubious successor to past manias like Dutch tulips, the South Sea bubble, Roaring Twenties New York, Kuwait’s Souk-Al-Manakh, Nikkei index warrants and Pets.com.
Why did it all go so horribly wrong for such a diverse range of asset classes? Simple. 2018 was the year the world central bank liquidity pump sputtered as the Powell Fed raised its borrowing rate thrice and reduced its USD 4.3 trillion balance sheet. Trade tensions between China and Washington soured investor sentiment on global growth. The tragedies in Syria, Libya, Iraq, Yemen, Somalia and the Sahel continued to claim human lives in the game of nations that has given our generation an endless symphony of sorrow. Geopolitical risk cannot be quantified in investment returns or human lives. But it exists. That much, at least, is certain.
Allow me to add my two cents worth by peering into my macro crystal ball for 2019. This is the year the Sceptered Isle will leave the EU in Brexit and sterling will have a nervous breakdown. The Euro will yoyo as Brussels, Rome and Berlin re-enact the 2011 Greek sovereign debt crisis in La Bella Italia. Trump’s $200 billion tariffs on Chinese imports will choke global trade. The GCC will continue to embrace fiscal austerity as Brent is $58 nearing the end of the year, while government budget breakeven prices are $90 or even $120 plus. King Dollar will continue to be the big enchilada in global finance and export deflation to the emerging markets. Trump will impose sanctions on Iran and then grant waivers to countries that import Iranian crude to slash U.S. gasoline prices. The big losers of 2019? Middle East sovereign bonds, sukuk and most real estate micro-markets. Private equity will be haunted by the ghosts of Abraaj and the dozens of wannabe Abraajs that have proliferated east of Suez. Egypt will continue to make progress on its draconian IMF adjustment program. A potential sovereign debt default if no IMF lifeboat emerges? Pakistan. Corporate credit? Leprosy at a time when credit spreads widen and default rates rise. Cinderella valuations? New York money centre banks but not Goldman Sachs’s vampire squid assailed by an Abu Dhabi sovereign fund’s lawsuit against the $3 billion heist from 1MDB in Malaysia. Yet this is only a crystal ball and those who peer into crystal balls must be forced to swallow shattered glass. LOL!
