If it is true that every cloud has a silver lining, investors are having to use ultra-powerful telescopes to discern any sign of one amid the current market storm.
A string of records have been broken in past weeks: Biggest daily market drops, unprecedented volatility and wild index fluctuations that have been everyday occurrences as the long bull market has come to an abrupt end. So extreme have the market gyrations been that analysts have had to go back to the Wall Street crash of 1929 to find a comparison. And that, of course, heralded the most prolonged depression of the 20th century and led, eventually, to World War II.
And yet, if history teaches us anything, it is that downturns eventually become recoveries and that rising market cycles outlast downturns. Kenneth Rogoff, the celebrated Harvard economist, sums it up neatly in the title of one of his books: This Time Is Different: Eight Centuries of Financial Folly. The folly this book refers to is that markets will never recover.
There is another factor that always happens in every downturn: Someone, somewhere makes a lot of money. Catching a falling knife is never easy; and plenty who try this trick lose their fingers. But after every downturn and market shock in history, a beneficiary has emerged. Sometimes, Hollywood makes a movie about the winners (think The Big Short). More often, these contrarians are briefly feted in the media, then the world moves on. Either way, it is more often a question of luck than good judgement that brings profit from turmoil.
The current pandemic-led correction will be no different. Some winners can already be called: Surgical equipment makers, medical ventilator manufacturers and video conferencing companies, for example. But the real prize lies at a wider, more sectoral level, and there is golden opportunity for the Arabian Gulf to emerge a winner from the current coronavirus-led market slump.
The sectors that have been hardest hit are those at which the GCC region excels: Airlines, hospitality, hotels and tourism. And the GCC has a number of factors that will insulate its sector champions from the pain being felt by their global peers: The unique private/public nature of many GCC players means they receive more forbearance from their banks and lenders. Their credit ratings take longer to be downgraded in line with global peers. And the nature of the region’s sovereign wealth funds means there is ample capital to be deployed during a perfect storm.
We have seen the region benefit from disaster before. At the nadir of the financial crisis, GCC sovereign wealth funds took part in capital-raising efforts by several western banks. Abu Dhabi famously made hundreds of millions in profit from an investment in Barclays bank; the Qatar Investment Authority holds large stakes in Barclays and Credit Suisse today. And of course Prince Alwaleed bin Talal of Saudi Arabia acquired a large part of Citigroup when that bank was in distress in the early 1990s.
The current pandemic crisis may dwarf the great financial crisis. In one sense, it already has: A public health crisis is far more harmful in human terms than a banking crisis. Nobody died as a result of the credit crunch.
Leaving the human tragedy to one side, the GCC’s companies, governments and funds may be able to seize commercial opportunities arising from the panic to acquire assets at extremely attractive valuations. The close links that the region’s governments have with the private sector means that partnerships can be formed to take stakes in strong but distressed businesses and assets around the world.
The biggest possible hindrance to this scenario is the plummeting oil price. GCC government revenues will slump – if they have not already – as oil flirts with the sub-$30 per barrel level. This will understandably lead to a retrenchment and focus on domestic priorities. But their private companies and sovereign wealth funds may be able to act with more freedom, and to pounce on opportunities around the world.
This should not be seen as a threat by overseas companies: Arabian Gulf shareholders have time and again proved to be long-term, benign and passive. No-one likes selling in a trough, but these are extraordinary times, and a lifeline provided by Gulf investors should come with outsized returns.
If Arabian Gulf investors are to seize the silver lining to the coronavirus cloud, they must move decisively and they must not fear the short term criticism that will greet any move. If they can do this, there may be a Hollywood movie to be made with a happy end.
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