Gulf Investors Must Beware Of the American Bubble

Clearly, you can understand why. In one of the strongest runs for US markets in history, the S&P 500 Index has increased by about 50% over the last two years. The return for investors who were astute enough to purchase Magnificent Seven technology stocks has been much higher than that of many Gulf financial players.

Is the Mother of All Bubbles Ready To Burst?

Due to his tax and regulation-cutting policies, Donald Trump's reelection as president has boosted the US economy and stocks as well as other assets like cryptocurrency and real estate. Investor confidence surveys show a generally positive outlook for the future, while evaluations of negative risk, such as the notorious VIX index, are at all-time lows. However, the US gravy train may eventually hit the buffers, according to some market gurus, as such outstanding performance cannot be maintained permanently.

Although he was unable to predict when it would occur, Ruchir Sharma, head of investment firm Rockefeller International, issued a warning a few weeks ago that the "mother of all bubbles" in the US financial markets was ready for a correction.

Warnings Regarding Valuation and Debt Reaching All-Time High

Valuations have been higher for the longest time since the run-up to the dotcom bubble of the early 21st century. The possibility that Trump's new administration, which is as erratic and unpredictable as the man himself and has a retaliatory agenda against established institutions, won't be able to respond quickly enough to a financial or market catastrophe is also very real.

All of these risk variables are present in the context of the most divisive geopolitical and mic environment in many decades. Generally speaking, stock markets are not thought to benefit from protectionism, tariffs, or threats to global commerce.

Global Risk And Regional Consequences

Additionally, gulf nations own US Treasury debt worth billions of dollars, which may be extremely volatile in the event of a domestic financial crisis. Official statistics, however, show that neither owns more than 1 percent of US Treasury paper, and their holdings have stayed mostly unchanged in recent years.

However, since US financial institutions have been strong supporters of diversification plans in Gulf nations, any stress in the US could have repercussions for regional markets.

We all witnessed in 2009 how the global financial crisis that was primarily domestic in the United States eventually reached the United Arab Emirates in the form of the Dubai World crisis, which briefly threatened to destroy Dubai's economy. The scene has altered dramatically during the past sixteen years.

Nothing in the financial systems of the United Arab Emirates or Saudi Arabia appears to pose a threat to Dubai World, and their financial systems are still praised for their resilience and capital strength. However, regional authorities should be reminded that everything good, even the remarkable performance of the US financial markets, must end.