Batten down the hatches against the forthcoming financial storm

Investment expert Peter Cooper warns of difficult times ahead.

How do you spot an approaching storm in the desert? In the old days perhaps your falcon started to twitch. The camels grew restless. Still after a while the billowing clouds of dust on the horizon sent you running for your life.

Perhaps today I can see a rustle in the palm trees in my garden and the birds have gone quiet. To my mind this is like the summer of 2008 all over again. Then, as now, I issued far too many early warnings. I even panicked and sold all my business interests ahead of the crash.

“Why are you so pessimistic?” That’s what my business partners wanted to know. I replied that it was the overwhelming level of debt that made me convinced that we were all doomed.

It is the same now, except that in most parts of the world the debts are considerably higher, and global financial markets are only held in balance by the precarious manipulations of the central banks to keep interest rates down at record lows.

What could upset the applecart very quickly is a rise in interest rates by the Federal Reserve. They may or may not do so as soon as September.

Then again a Greek or Ukrainian default could achieve the same effect on interest rates via the global bond markets.

Once the cost of money goes up it won’t only be bond markets that crash but equities and real estate too. Overvaluation is everywhere.

Take US stocks, for example. The Case-Shiller cyclically adjusted price-earnings ratio has only been this high in 1929, 1974, 2000 and 2007. US equites have only been higher as a percentage of GDP once before in 1929 – the year of the Great Crash.

Bond prices in many countries have not been this stretched since Napoleonic times. Real estate sells for vast multiples of the income of the people who live in it.

It’s no different in the UAE, though we have already seen a retrenchment in bonds, stocks and real estate prices over the past year or so. The camels have been getting restless.

What comes next is the real storm. How will it affect us? And what can individuals do to defend their personal financial position?

First, the good news. This is not going to be another 2009 for the UAE. Leave that to Qatar with its pre-Fifa World Cup property bubble, bust by the FBI arrests in Switzerland last week.

It won’t be a double-whammy of a real estate crash as well as a global financial crisis this time around. Oil prices and tourism would naturally take a big hit but both sectors have a capacity to rebound quickly.

In the very important case of oil prices, we may have a sense of deja-vu if further progress by the Islamic State in Iraq quickly causes a geopolitical price scare, just like the Arab Spring did after the global financial crisis.

It is also inevitable that the central banks of the world would again print even more money to try to reflate the global economy. That also seemed to help oil prices pick up after the last crisis.

So provided the UAE remains one of the world’s shrinking supply of safe havens, then it is probably not going to be a bad place to sit out the next storm, provided that your job is secure or you have enough savings to tide you over a bad patch in your career here.

As to what to do about your finances that is easy. I met a young friend who had just sold a stake in his business recently and asked him what he was doing with his money. He’s sold all his other shares too, except those in gold companies and has a nice cash pile. His partner has still bought an off-plan property but is holding off on further investments.

Really if you are lucky enough to have cash sit on it, and if you have not sold your most-liquid investments, then hurry up and do so. Buy some gold and treat it as a currency that central banks can’t print, and if you want to own shares, then gold company shares most probably will be the next big thing.

Oh and if you have pensions tied up in bonds, please get rid of them. Houses will still be there when the storm has passed. I am not so sure that will be true for many bonds.

Peter Cooper is the editor of ArabianMoney.net

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