Sudip Bandyopadhyay’s Blog

Dubai must feel a little like Mark Twain, these days.  Upon reading his own obituary in the newspaper, Twain wrote: “The report of my death was an exaggeration.” Dubai has had its share of obituaries as it suffers from a property bust and contagion from the global credit crisis.  Headlines from Cairo to London to New York, laced with schadenfreude, proclaim its demise.  Newsweek said simply: “Goodbye, Dubai”. The emirate is certainly stumbling.  Many of its state-owned entities drown in debt.  Several high-profile property projects have wilted under tight credit, debt and corruption.  Its stock market has been in free-fall.   Still, news of Dubai’s death has been greatly exaggerated.  Its fundamentals as a regional hub of shipping, services, people, trade and capital have not changed, Disneyland Dubai has crashed but the core business model of Dubai remains sound. That business model predates modern financial markets and the hyper-globalisation of today.  It is not about lavish hotels, skyscrapers and manmade islands in the sea.  It is a simple model, reflected in the statement of Sheikh Rashid Bin Saeed al-Maktoum, the late ruler of Dubai. “What’s good for the merchants is good for Dubai.” Creating a hub for merchants has been an al-Maktoum family tradition for more than a century.  And it is those merchants and migrants, dreamers and entrepreneurs, who built Dubai, who deserve equal credit for its rise and who will help it grow again.  This openness to foreign talent will support Dubai as it faces today’s crisis. Speculations will leave but plenty will ride out the storm, including Arab professionals who have chosen Dubai as the place to achieve their drams and middle-class Indian mid-levels managers who make the city work.

To understand why Dubai will survive, it is important to understand its commercial geography.  It is not solely an Arab state – demographically or commercially.  It is a commercial and tourist hub for a region that encompassed the growing markets of south Asia, emerging Afica, oil-rich Russia and the Gulf states, Iran, central Asia and the Caucasus, Europe and China. And it works largely because of the heavy infrastructure investment made by Dubai’s rulers and the expatriate traders, service professionals, construction workers, bankers and techies who make up 90 per cent of the population.  Dubai was never, as one newspaper called it, “The Middle East’s economic powerhouse.” Rather, it was and remains a highly successful entrepôt in one of the richest and fastest-growing parts of the world. Like most entrepôts, it feeds from and fuels growth.  Dubai’s property bubble popped. Its core business model, however, did not. Property corrections and over-leveraged state entities can be fixed. Becoming a poor environment for trade would be far more dangerous. When the world growth engine restarts, city-states such as Dubai will flourish. In the meantime, Dubai will serve as a vital, if somewhat clogged, artery in world trade. The battered but still battling hub city will rise again.

Markets continued to witness strong buoyancy during the last week largely on account of positive global news flows resulting in Indices both Sensex and Nifty increasing sharply by 10-12% crossing the 10000 and 3000 levels mark on sustained buying from FIIs in frontline stocks and partly also from short positions being covered by market participants.

The main trigger provided was on the global front with U.S. government announcing a $1 trillion package to remove toxic assets from the Banks without further recourse to fresh government aid. This resulted in to U.S. markets bouncing sharply.  Sentiments also got a boost following more positive data on the U.S Economy pertaining to sales of newly built U.S. single-family homes, which rose by 4.7% in Feb 09.

On the domestic front, Inflation for the week ended March 14th tumbled to 0.27% yoy, the lowest levels in 30 years, from 0.44% previous week and is significantly lower than RBI’s projection of around 3% by March end.  Policy action from RBI is eagerly awaited by markets and the industry.

The pull-back in markets gained strength last week and was largely due to rally in global peers and the short squeeze witnessed ahead of ‘F&O expiry’. Indices have now closed above significant levels of 10,000 for Sensex and 3100 for Nifty. Activity was on the whole widespread and  visible in mid-cap and small-cap segment too. Volumes were also heartening and supportive of the rally. However markets may have now turned overbought and higher levels may attract traders to cash in on the gains. Also now with the elections round the corner, political uncertainty is likely to weigh high on markets.  A limited upside can be forseen during the next week with institutional activity and Global news-flow likely to swing the markets. The markets are likely to remain range bound and volatile.
( ** this is the transcript of the weekly column I write for Economic Times )