I was stunned to read a Boeing report that forecasts that the global passenger jet fleet will more than double to 45,250 by 2035. Given that almost 20,000 of the world’s in-service aircraft will be retired or converted to freighters in the next decade, Boeing forecasts at least $3 trillion in financing for 40,000 odd new aircraft deliveries in the next eighteen years. This makes aircraft leasing one of the few growth niches in global finance. While Tony Ryan and Guinness Peat Aviation pioneered the industry’s growth in the late 1970s, putting Dublin on the world map as he epicenter of global aviation finance, I see no reason why Dubai and Abu Dhabi should not take advantage of the sheer scale of the secular growth in the industry to nurture an ecosystem in aviation leasing and finance: a new Dublin is in the desert. After all, even new, 8000 of the 20,000 odd passenger jets in service even now are leased, not owned, by airlines. The global aircraft leasing markets enable Emirates and Etihad airlines to finance new aircraft orders, manage their balance sheets and manage their global route networks more efficiently.

Chinese banks have emerged as major players in global aircraft leasing, as symbolised by the IPO of Bank of China (BOC) Aviation and CDB Financial Leasing’s initial public assets in Hong Kong while investors as varied as Tony Fernandez’s Air Asia and Li Ka Shing have actively acquired aircraft leasing assets.

The world’s top two aircraft lessors now are General Electric’s Capital Aviation Services (GECAS) and Dublin’s Aer Cap, with over 1000 aircraft each leased to the world’s leading airlines. Chinese megabanks ICBC, Bank of China and CDB own three of the world’s largest operating lessors. Since Chinese demand for new passenger jets will shape the future of aviation in the next decade, it does not surprise me that Chinese banks, conglomerates and even Hong Kong taipans have scrambled to invest in aircraft leasing assets. There is surely a lesson here for the GCC’s sovereign wealth funds, merchant banks, Islamic banks, insurance companies and family offices. As an investor, I find this sector interesting because it is possible to earn 6–8% on senior debt and as much as 15% in a diverse portfolio of aircraft leased to the leading airlines in the US, Europe and Asia. The Middle East and Africa are 10% of the global leased aircraft market even now. Emirates Airlines has a lessee fleet of 122 aircraft, though global airlines like American, Air France KLM, IAG (British Airways, Aer Lingus, Iberia) boast three times as many leased aircraft.

It is no coincidence that 60% of passenger jets owned by lessors are narrow body aircraft that are more cost efficient to operators and can be rerouted easily compared to wide body aircraft while also in great demand by Asia, Europe, GCC and Latin America’s low cost carriers. Budget airlines use fleet expansion to launch short to mid haul routes. This makes the narrow bodied jet leasing segment highly liquid, particular to the white hot regional budget airline operating in the Pacific Basin and even India. It is no coincidence that both General Electric GECAS and Air Capso dominate the global narrow body passenger jet leased fleet market.

The age of a leased aircraft is critical as older aircraft have significant residual value and maintenance cost risks which can gut their credit rating in an economic slump even as borrowing costs in the capital markets spike higher, as the airline bankruptcies in the 2008 and 2009 global recession demonstrate. This is the reason Chinese bank lessors tend to prefer aircraft fleets whose age ranges between three and five years.

I believe investing in aircraft lessors, not airlines, is the optimal play on the secular growth in global air travel. It is imperative that aircraft lessors must own young narrow body fleets, have stable cash flows, and the lowest cost bank funding possible scale is mission critical because there are 160 aircraft lessors operating worldwide and only the biggest firms can diversify jet type, fleet age, lease duration and client concentration risk. Of course, EPS growth, rising operating margins, free cash flow, cheap valuations and high ROE are the holy grail for investors in the global aircraft leasing market.

Macro Ideas – central Europe and the GCC investor

Central Europe has been one of the more neglected areas of investment for Gulf private clients, even though UAE sovereign wealth funds have invested in Austria’s state oil firm, Serbian property projects, Polish banks and Romanian oil drilling and exploration companies. I have traveled extensively in the region in a quest to analyse its economic and financial potential. This region, the former Habsburg empire, later the Warsaw Pact satellites of the USSR, suffered terribly from the Balkan wars of the 1990s, the wars in Croatia, Bosnia and Kosovo. The election of populist, nationalist governments in Budapest and Warsaw is also a deterrent to foreign capital inflows. However, the region boasts fabulous property investment opportunities, some of the highest economic growth rates and literate populations in Europe and some of the best managed blue chip growth companies in the emerging markets – all within the protective umbrella of EU membership.

Although Hungary is a highly-developed economy in the heart of central Europe and Budapest was once the twin capital of the Austrian Empire, this nation’s investment potential has been crippled by Viktor Orbán’s statist and even autocratic policies. In any case, the Hungarian government has clashed with the EU and Berlin over political reform, privatisation and immigration, a red flag for global investors.

I believe the Czech Republic is ideal for property market investors as it is stable, wealthy, highly developed and boasts public infrastructure that even rivals France or Germany in some aspects. Prague is one of the world’s most beautiful cities, the city of Kafka and Milan Kundera I love. The Czech Republic is also the emergent auto component, electronics and information technology hub of central Europe. The Czech kroner is also undervalued, now that Prague has removed caps on its potential appreciation. If any nation is destined to emerge as the Singapore of Central Europe, my bet is on the Czech Republic. It does not hurt that Emirates flies nonstop to Prague from Dubai too. The frontier market Cinderella of this region, for me, is Romania, the land of Count Dracula, Saxon castles and mountain bears!

Currencies – King dollar will not be dethroned as a reserve currency

The collapse of the Bretton Woods exchange rate regime in August 1971 coincided with a spectacular wave of inflation and economic volatility. The 1970s witnessed the OPEC oil prices hikes, a deep recession, the rise in gold prices from $35 to $800 an ounce, a savage bear market in US Treasury debt and Britain’s desperate quest to secure an IMF loan to protect sterling. The 1980s witnessed the worst global recession since the Great Depression, the collapse of international banks like Continental Illinois, Latin America’s sovereign debt crisis and a US–Japan trade war.

The 1990s witnessed financial Armageddon in emerging markets as diverse as Thailand, Mexico, Indonesia, South Korea, Turkey, Argentina and Russia amid a wave of bank failures, currency collapse and hyperinflation. The first decade of the 21st century culminated in Lehman’s failure, Wall Street’s subprime debt disaster, $12 trillion in central bank new money lifeboats and the near collapse of some of the world’s biggest banks. There is no doubt that international finance has a financial casino dimension, thanks to leveraged trillion dollar pools of capital – daily turnover in the foreign exchange market alone is $5 trillion – that move across the planet at the speed of light.

It is ironic that John Maynard Keynes, the architect of Bretton Woods in 1944, once proposed the blueprint of a global currency called Bancor to replace the discredited gold standard. Keynes died in 1946, a year where a bankrupt, exhausted Britain was ruled by Labour Prime Minister Clement Atlee with zero ambitions to reshape the international financial system. Britain did not even want to give up sterling and the independence of the Bank of England while the German Bundesbank and the Banque de France midwifed the creation of the euro and the ECB in the late 1990s. However, the Greek/Cyprus, Irish, Spanish and Italian banking crises all proved to the world that the euro would not replace the US dollar as the world’s reserve currency in our lifetime. China’s yuan, tightly managed by the People’s Bank of China (PBOC), crippled by capital controls, serves as a trade finance currency in Hong Kong and Burma but has no hope of challenging King Dollar as the global currency hegemony.

This is not to deny the fact that a common currency benefits regions whose economies are integrated and cross-linked by the exchange of capital, people and traded goods. This was the intellectual ballast behind the introduction of the euro in 1999 but synchronized monetary policy in the absence of fiscal and political unification led to a succession of economic, banking and currency crises in the Club Med nations of peripheral Europe. The GCC common currency proved a non-starter.

Countries as different as Panama, Hong Kong, Saudi Arabia and Argentina simply pegged their currencies to the US dollar and surrendered their monetary policy independence to the Federal Reserve. The closest thing to a world currency since the Roman Empire’s gold denarius, the British empire’s pound sterling, the Soviet empire’s non-exchangeable ruble is postwar America’s US dollar. Even Bretton Woods’s $35 gold war linked to the dollar. Keynes called gold a ‘barbarous relic’ because the gold standard contributed to the financial shocks and deflationary misery of the Great Depression in the 1930s. Keynes was right even though in the long run he too is dead.

As long as Russia and China challenge US supremacy in international relations, a formal global central bank and a common currency is a fanciful nation. President Trump’s protectionist policies and threats to start trade wars with China, Mexico and even Canada have undermined faith in the US dollar’s role as a global reserve currency. Trump also broke a taboo by openly talking the down down (‘it’s killing us’) to promote US industrial exports from the Rust Belt. Even though China has a $350 billion trade surplus with the US (which has a $500 billion trade deficit), Trump’s erratic policies do little to promote the yuan’s stature as a reserve currency and the Communist Party has imposed financial repression on its 1.3 billion people from the moment Mao seized power and established the People’s Republic in October 1949. Japan’s two ‘lost decades’ and the failure of Abenomics have relegated the yen to the second league of global currencies. The euro lost its bid to supplement, let alone replace, the US dollar as a global currency in the Greek sovereign crisis. IMF Special Drawing Rights are just government book keeping units. Bitcoin is a joke. King Dollar has not been dethroned and will not be in our lifetime!

This article was originally published in the Khaleej Times.