Shocking news emerged in late November. Everybody thought that Middle East as the relatively reclusive market, could has less impacts on global markets Yet, Dubai World’s debt standstill triggered global market’s avalanche, an unpleasant surprise to the whole world.
Real estate bubble burst
Following the economic recession of its western counterparts, the real estate industry in Middle East burst as a consequence. The government owned flagship holding company, Dubai World in United Arab Emirates, inevitably asked for an extension to serve its debt obligations. In late November, Dubai World’s property arm Nakheel, which is the developer of the world famous luxurious reclamation projects in Gulf, including the Palm Jumeirah and the World Islands, declared a restructuring of outstanding Islamic debt due in mid-December. Fear rose on further financial deterioration of the Middle East world might cause dampen the green shoots of economy. That triggered the global market slump. Furthermore, lack of information for debt repayment from the government also caused haze over the Middle East world. The Middle East markets inevitably hurt the most, the same case in fund performance too. The Africa and Middle East Equity fund category lost 5.58 percent in the single month while the Other Africa & Middle East Equity fund category fell even deeper, which dropped 6.67 percent in the same period.
Europe took the hit
The influence of the standstill call of Dubai World spread to Europe. The cost of financing rose especially in Greece and Hungary. Greece is one of the countries having the highest debt in Europe. The Dubai incident put pressures on the cost of financing as well as the sovereign credit rating for these countries. Greece’s debt to GDP ratio has risen to an unsustainable level without sound fiscal discipline thus it becomes a target for sovereign rating downgrade (As of December, the sovereign credit rating of Greece was downgraded). Both Greek market and economy were under vast pressure. The Greece Equity fund category dropped 11.64 percent, which was the worst performing Morningstar category during November.
Commodities still strong
Fortunately, there are still good news in the market. Commodity continued its rally in November. Gold price beat its all time high, exceeding USD 1100 per troy ounce. The skyrocketing price of gold was supported by the demand from central banks including that of India, China, Russia and Sri Lanka. Other precious metals like silver, copper, platinum and soft commodities such as agricultural raw materials also surged. The high level of oil price also contributed to the commodities rallies. The Sector Equity Precious Metals funds climbed 14.85 percent in the single month and became the best performing Morningstar category. While the Sector Equity Natural Resources fund category also performed very well with the category return increased 7.55 percent, which placed the fifth in November among all Morningstar categories.
No surprise from U.S. data
The U.S. Economic data were still mixed and the economic growth prospect remained challenging. The Fed fund rate remained unchanged after the FOMC meeting. The unemployment rate rose to 10.2 percent, at its 26-year high level, and that worried the investors. On the bright side, the consumer confidence was better than expected. Personal consumption expenditure increased by 0.7 percentage point, new home sales climbed and initial jobless claims dropped to a year low. All these helped to maintain the slow recovery of the U.S. economy. U.S. large-cap equity performed fairly well in November. The U.S. Large-Cap Growth Equity, U.S. Large-Cap Blend Equity and U.S. Large-Cap Value Equity category gained 4.55 percent, 4.52 percent and 3.98 percent respectively.
China lagged behind its emerging counterparts
The emerging markets registered good returns in November. India was bolstered by strong manufacturing growth and reported a better than expectation economic growth of 7.9 percent. The material rich Latin America also boosted by the strong commodity price. India Equity and Latin America Equity categories posted the increase of 7.71 percent and 7.79 percent respectively. China announced to issue the 50-year government bond but without other significant stimulating news, the China Equity gained 4.15 percent, lagging its emerging counterparts mentioned above.
The Dubai World debt standstill worried the Islamic and Emerging bond markets. Risk aversion drove money flowing into the U.S. Dollar based assets and greenback showed a slight rebounce in November. In light of higher credit rating, investors favored Dollar and dollar government bonds over the emerging market bond or other currency based bond. Dollar Government Bond category grew for 1.4 percent and the Euro Government Bond increased 2.34 percent.
