Gus Cosio says so

Ideas on the Philippine Stock Market

Good Bye, Dubai!

very early   1 December 2009 Philippine Stock market had not yet opened

The bomb that rocked the financial markets last Friday was the announced debt restructuring of Dubai World Holdings and its property development subsidiary Nahkeel.  It is significant because Dubai went on a land development spree with the hopes of attracting all sorts of wealthy Europeans, Indians, and Chinese investors to a middle eastern paradise that they were building.  Abu Dhabi is the leader of the UAE and Dubai is the second most powerful emirate.  But unlike Abu Dhabi which is oil rich and has one of the largest sovereign wealth fund in the world estimated at US$800 billion, Dubai does not have anything but land which it developed and is trying to sell to investors.  Only 6% of its income coming from oil resources.  Dubai World and Nahkeel apparently has debt of around US$80 billion.

The fundamental question that faces us as investors is how Dubai is going to affect one major driver of the Philippine economy – Dubai based OFW.

Dubai is the most populous emirate in the UAE with 2.262 million people as of year 2008 but only 26.1% are Arabs.  The rest are expatriate workers or OFWs.  The biggest foreign nationals are Indians (43.2%), Pakistani (13.3%), Bangladeshi (7.5%), Filipino (2.5%), Sri Lankan (1.5%), Europeans (0.9%), Americans (0.3%) and other nationalities (5.7%).  From an article in the New York Times dated February 11, 2011, many foreign workers had been laid-off or left Dubai since the global financial crisis hit.  Based on this information, there would have been around 50,000 Filipino OFWs in 2008, but a good number of these would have been laid-off or have left Dubai for other countries since last year.  Going forward, the impact of this crisis in Dubai on the Philippines had already been felt and will have very little significance on the economy.

Our neighbors, Hong Kong and Singapore may feel greater impact because many property investors and sources of financing to acquire these properties had come from these financial centers.  While the absolute amount of US$ 80 billion looks large, it is not significant enough to create a huge dent in the portfolios of Hong Kong and Singapore firms because these portfolios are very much diversified.  Judging from the recovery seen in these markets on this week’s first trading day, it looks like the damage has been discounted by the market to a great degree.  My view is that the market had even discounted a situation beyond worst case because when UAE banks opened Monday, they were provided liquidity access by the local monetary authorities.

Anyway, on a global scale, it appears that the situation is something that banks have already anticipated and have set aside reserves for.  I doubt if the Dubai crisis will linger much further and threaten markets.  Unfortunately, investors will take extra precaution and take profits particularly from positions taken 6 months ago.  It means that the biggest gainers in people’s portfolios will be most vulnerable to profit taking and short-term selling.

On an individual portfolio basis, it will be prudent to profit take and lighten up going to year-end.  That would give people enough money to take advantage of whatever January effect that is in the making.

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December 1, 2009 - Posted by | Financial markets in Asia

5 Comments »

  1. Thanks for the quick look through.

    I see there isn’t any real direct factor in our economy that could get affected. If at all, it’s how it may affect external financial markets or systems that could indirectly cause jitters locally; hopefully they won’t. But I suppose that our portfolio managers have learned from the past that prudence is the better part of valor, as they’d say, and are are acting accordingly.

    Comment by Alex Castro III | December 1, 2009 | Reply

  2. There are so many calendar anomalies (not to mention further categorization into outdated and existing) that I have already mixed them up. What you say January effect do you mean that prices are expected to go up or go down in January? Thanks.

    I also remember reading from an article that the first few trading days of the year are very telling on the perception of the big funds for the rest of the year.

    Comment by Warren | December 1, 2009 | Reply

    • The January effect comes about because at the start of the year, portfolio managers receive new money or redeploy existing cash to either re-establish core holdings or take new positions. The summation of all these portfolio shifts creates higher than usual turnover activity. The market adage that says volume precedes price comes to fore as trading activity increases and investors get more comfortable entering the market. Historically, it happens starting the end of December into the end of January almost every year. You don’t have to take my word for it. If you can find charts going back 30 years or so, you’ll discern this January effect.

      Comment by Gus Cosio | December 1, 2009 | Reply

  3. Thank you sir Gus, thats a bit similar with what I’ve read from Jeremy Siegle, who did a study based on decades of US data.

    I suppose this means that we should focus on index stocks that are undervalued and sell those that are overvalued, in effect counter-trending, right?

    Comment by Warren | December 1, 2009 | Reply

    • Warren,
      That is the classic approach. That is also the fundamental hedge fund strategy. Most of the time , that strategy works simply because it is fundamentally based.

      Comment by Gus Cosio | December 2, 2009 | Reply


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