Dubai: Financial experts have downplayed speculations that another global recession is brewing as a result of the downturn in China, although the UAE is now very well positioned to ride out another crisis.
Panic gripped the global markets on Monday when stocks across the globe plummeted following the weakness in China. Several indices bounced back after fears of “Black Monday” started to dissipate, but it remains to be seen whether another global rout will happen again soon, especially since the Chinese markets are still tumbling.
Akber Naqvi, executive director at Al Masah Capital, said it is too premature to say that the world is about to go through a recession, citing that the recent market turbulence could be just a “necessary correction.”
“It’s too early to speculate if we are facing a global recession. Recent market activity in some cases is a correction that was necessary as valuations were too expensive and in some cases was required because of duration,” Naqvi told Gulf News.
“A confluence of triggers (China, oil, currency wars, UD Fed rate hike) have combined to create a nightmare August, but we need a few more weeks and possibly months to determine if we are facing a downturn in economic activity across the globe.”
The world’s second-largest economy has recently devalued its yuan amid falling exports and slowing growth. There have been speculations that the weakness in China can have a knock-on effect for the rest of the world.
Ruchir Sharma, the head of emerging markets and global macro at Morgan Stanley Investment Management, said that the recent developments in China suggest that the world is heading for a recession.
“The policy panic in Beijing over its currency and the fall of its stock market suggest that the next global recession likely will be ‘made in China’,” Sharma wrote in the Wall Street Journal.
Goldman Sachs issued a note on Tuesday to assure clients that China is not going to drag the rest of the world down. “The drop in commodity prices during the past year and recent economic and foreign exchange weakness in China and other emerging markets will not tip the global economy into recession,” the investment bank said in a note.
But since its normal for financial markets to go through periods of ups and downs, investors would be wise to avoid putting their eggs in one basket and keep an eye on the long term. “The poem by Rudyard Kipling, ‘if you can keep your head when all around are losing theirs’ springs to mind as a good mantra to have,” said Andrew Prince, financial planner at DeVere Acuma.
“Throughout history, rarely are there more than a couple of consecutive years where any assets have continually risen without some form of profit taking and corresponding fall in value,” he said.
“Clearly the events in China are unsettling and markets as a whole whether that be bond, equity or property don’t deal with uncertainty very well. This also applies to the expectation of when the Fed will increase interest rates which is likely to be deferred for the time being given the events of August.”
If recession does develop, Naqvi said strong economies like Dubai are better prepared. “It has further diversified its economy. The dominant banking and real estate sectors are under control. There is greater synergy with Abu Dhabi and the government is committed to a spending plan that focuses on the city state’s key strengths: aviation, tourism, logistics, etc.”
“However, given Dubai’s greater connection with the global economy any downturn will have an impact especially on certain sectors but overall it should come out of it stronger as it has before.”
