Ioannis’s Thoughts

For few days in a row, shares in stockmarkets have been rallying. Is there any logic in this?

Governments are borrowing at a record breaking rate. Unemployment, and recession are also progressing at record breaking rates.

China is also seeing some effects of the economic downturn – making it truly global.

Surely it’s not the time to be investing in equities.

But then what can one invest in? Property is illiquid, so you can’t react if the market turns worse. Interest rates are zero so you can’t be keeping cash or government bonds. Gold is generally overpriced in what analysts have started calling the next bubble. Long term investments are also not to be considered with such volatility and uncertainty.

More and more investors seem to be turning to trading shares, or share derivatives with inherent margin. They either buy like mad, or sell like mad, and change their minds every day based on market sentiment. This is pure speculation, with no reference to any underlying fundamentals.

Could this signal the bottom of the market, the beginning of a new bubble, or just vain attempts to make  bit of money while you lose what’s left?

Singapore’s real estate market went down 80% in the wake of the Asian Financial Crisis, and that city is still there as well.

The recent article on AMEInfo compares Dubai with Singapore at the beginning of the Asia financial crisis, and suggests that the current talk of Dubai’s troubles is hype – just like the talk of Dubai’s boom a year ago.

There’s certainly a lot of truth in this comparison. Indeed the Asian Financial Crisis saw property devaluations in most of the commerce centres of the region. The Hong Kong is a classic case study and one that can be used to discuss Dubai.

On the more positive side, Dubai has positioned itself not only as a financial centre but also as a tourism one. Little comfort while tourism is as hard hit as finance, but we could expect some recovery in tourism faster, once consumer sentiment grows.

The negative view is that the current crisis is more global and may take longer to resolve. Those Asian countries were also not that reliant on expats who can get up and leave when the crisis hits.

An interested question that has started coming up in some side columns is the likely effect of the global economic crisis on China. Robert Peston has even gone there for a week to report from the ground, ignoring his reporting here at home.

Clearly, the Chinese government is better prepared for this than the West – with well capitalised banks, and a big fiscal surplus in recent years, the Chinese can at least count on borrowing and government spending for some time.

However, the problem remains. If there is no demand for your products, loans to keep a business going serve little purpose.

I hear that the Chinese have started a big campaign to boost internal demand. They are encouraging people to buy household appliances and cars. In economic terms, this is encouraging using some of those savings that have accummulated to prop up businesses in this downturn. It’s better to equip each house with a TV at the expense of the state than to close down the TV factory.

In real terms, what we are actually seeing is the beginnings of a massive increase in living standards for the biggest nation on earth – while the West is experiencing the sharpest decrease in living standards in decades.

Is this the time when the world really converges? Globalisation scholars will tell you that this shift was long overdue. I bet some people in the West never wanted, and still don’t want to hear.

On many occasions, I have wanted to write about something that matters to me but is probably too boring for my friends to read.

Whether a theory, or something relating to my industry, or something that interests me academically – this will be the place where I share snippets of my thoughts.

Happy reading.