At the start of the year gloomy predictions about the oil price outlook were as common as Ferraris in the UAE. Oil prices in the low $30s looked quite likely at some point in 2015.
Yet four months into the year and the wiser bulls such as star oil trader Andy Hall and the billionaire Sam Zell appear to have got it right, with Brent crude now trading in the low $60s and momentum to the upside. But what does this mean for investors in the oil-rich UAE?
Basically it is going to be a shorter recovery cycle. That means the bargains in real estate will occur sooner and at higher prices than otherwise. It will also make UAE equities a no-brainer in any global stock market correction, though with some qualification.
However, a major fall in global equity markets, and that will obviously include the UAE and other oil states, is still on the cards for two reasons. First, equity valuations are historically way too high given the slowdown in global economic growth. And secondly US interest rate rises by September are what is known among horse owners as a racing certainly.
Could oil prices have a double dip if global stock markets really took a tumble, say this autumn? That would be only to be expected. On the other hand, having just seen a strong oil market recovery we can now be much more confident that this will be the final bottom and that oil prices will rebound again. Why’s that?
Well, if you look at why brilliant analysts like Mr Hall and Mr Zell were so confident of an oil price rebound a few months ago, it is easy enough to understand.
Their argument was that oil prices are only partly driven by supply and demand economics, and that speculative money flows into and out of this commodity are far more important.
Any major collapse in global financial markets would be met by a big increase in money supply from the central banks.
That is what brought oil prices back up in 2009 and kept them high until last summer. And that is also what rescued the UAE economy from its sudden stop in 2009 and delivered the sharp recovery that is still running this year, albeit on deficit financing.
The IMF predicts that the GCC states will lose about a fifth of their oil export earnings over the next year, and that probably includes an oil price recovery into the equation, and run an average fiscal deficit of 8.5 per cent. Every oil exporter is spending more than its income.
All the same, the oil price upturn is a break in what had become a strengthening down trend. True it may take time to be confirmed by the market dynamics discussed above. But house prices and local equity prices are currently priced for a far less favourable world of continued low oil prices.
If this is not going to happen then UAE investors should be shopping for bargains. In the residential market, Ramadan might not be too early to be out with the cheque book to take advantage of a low-cost mortgage offer.
We saw in 2009-10 how quickly the Dubai property market rebounded and Abu Dhabi was not far behind. Commercial real estate is on a slightly later cycle, but would also be a winner again.
For local stock markets, I continue to be more pessimistic about the immediate chances of an upturn. The coming machinations in global equity markets this year may decisively shift retail sentiment to the downside – and these guys tend to take a long time to cheer up after losing money.
Remember that when the Dubai Financial Market peaked in early 2006, it took seven long years to finally hit the bottom. Early buyers – and I was among them – had to be extremely patient for equity prices to rise, albeit rather like Chinese stocks over the past year the doubling of the DFM index in 2013 was spectacular (until it crashed last summer).
Experience of my own personal finances suggests chasing a recovery by investing in UAE property rather than stocks is a more surefire winner. And if you are an investor rather than owner-occupier, then rents will also be on a rising cycle. Why stay renting if you can buy?
So a stronger oil price is certainly to be welcomed by local investors. But real estate rather than the local stock market is probably the best way to go for more immediate and predicable returns.
Peter Cooper is the editor of arabianmoney.net