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Let Dubai Serve as a Reminder

Last week, prior to the Thanksgiving holiday, the Dubai government announced that it will look to restructure Dubai World; a government owned conglomerate, and asked creditors for a six-month delay on outstanding debt payments. The total liabilities of Dubai World are estimated to exceed $60 billion with existing creditors spread across much of the developed and emerging world markets. The announcement took much of the world by surprise and caused the U.S. stock market to open over 200 points lower although the drop was essentially cut in half by the close of the shortened trading day last Friday as traders and investors put the announcement into perspective. Additionally, as I write this post, the United Arab Emirates has indicated that it would step in, as needed, to support local banks through a special liquidity facility. This should help to stem fears of a potential run on the local banks that could have negative ramifications throughout the region.

More than anything, we, at Hennion & Walsh, believe that this event should serve as a reminder of the risks that are present in emerging markets and in the global capital markets as a whole, notably the financial sector, as the global economy continues to try and find its legs following the demise of the credit markets worldwide in 2008. It is clear to us that the global economy has not yet recovered and many potential bumps in the road to recovery still exist.

However, this has not stopped the rapid ascent of the emerging markets thus far in 2009. In fact, according to Emerging Global Advisors, the Dubai announcement had a negative weekly impact on emerging market sectors such as financials, energy and industrials according to the Dow Jones Emerging Markets Sector Titans Index. Yet, for 2009 year-to-date, all of the covered sectors, including the three previously mentioned sectors, have experienced double-digit returns.

It is often said that risk drives return when investing. However, investors should always first make sure that they fully understand the risks that they are assuming with any particular investment before making such an investment. After understanding the underlying risks, investors should then feel comfortable with the return that they are receiving on an ongoing basis for accepting the associated risk while also balancing the accepted risk within a diversified portfolio commensurate with one’s personal risk appetite.

 

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