Dubai sneezes and the world catches a cold.
Countries today are so close with each other that even if a smaller economy like Dubai’s has a problem with their debt, it can affect stock markets all around the world. Investors have again called into question the strength and stability of the world’s markets amid worries that if Dubai has to default on their debts with major international banks, could this trigger another major financial meltdown?
When Dubai’s main investment arm, Dubai World asked for a six-month delay on paying back its $60-billion debt, major credit agencies responded by slashing debt ratings on several companies in Dubai. Many major international banks that have lent money in Dubai are now having their loans are being called into question, leaving the global financial sector to watch its share valuations drop almost immediately as investors try to figure out who has exposure in this region.
For many of the larger European and Asian banks, that exposure could be in the hundreds of millions of dollars. While American banks have not yet released their figures, many U.S, analysts have already come out and said that they believe the U.S. sector’s exposure is minimal. Whatever the facts, investors will find out more in the coming days.
These types of world crises — the sort that spring up on a regular basis and spook the international community — need to be looked at differently than if you had a major crisis close to home. Investors should ask themselves, “Is this the type of crisis that can linger on for a longer period of time, or is this a one time event that will gradually work itself out?”
If this is more of a one-time event that will work itself out in a short period of time, then pullbacks in the stock market due to something like the Dubai announcement should be looked at as a buying opportunity. Many sectors of the market that have very little to do with Dubai seemed to sell off in sympathy with the overall negative tone, and these sectors are now possibly a lot cheaper than before the crisis hit, making this a great time to buy.
If investors feel the crisis may have longer term ramifications, then individuals need to get defensive right away and move their money to more protected investments like bonds or specific equities that hold up well when times are tough.
In my opinion, I would use any short term pullback in the market like the pullback just experienced from the Dubai debt issue as a buying opportunity. A small correction like this should always be anticipated. If you own good quality investments, your portfolio should be able to withstand these short term blips on its way to bigger gains in the future.
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Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.
CORRECTION NOTICE: Dubai is an emirates of the United Arab Emirates. A previous version of this column contained incorrect information. Metro regrets the error.