Trillions of dollars of European debt, unprecedented global unemployment and escalating problems with Iran will converge this year as potential economic "landmines", economists and analysts said at the start of the National Bank of Abu Dhabi (NBAD) Global Financial Markets Forum in Abu Dhabi yesterday.
Disruptive events last year including the Greek sovereign debt crisis, the US credit downgrading by Standard & Poor's and the eruption of civil unrest in parts of the Middle East, rocked a global economy still reeling from the 2008 financial crisis.
So far this year equity markets across the world have rallied as unrest subsided and central banks stepped in to help debt-laden countries.
But at the conference, which was held at Abu Dhabi's Emirates Palace hotel yesterday, delegates were warned markets may be out of step with economic reality and that the next two years could prove a highly volatile period.
"The potential for shocks are higher this year than in 2011," said Alessandro Magnoli Bocchi, the chief economist at the Kuwait-China Investment Company. "There are quite a few landmines that if we step on them will blow up."
The need to turn over huge amounts of sovereign debt and soaring unemployment are key concerns, he said. "About US$8tn [Dh29.3tn] of debt needs refinancing in 2012 and $1tn paid out. It will come from central banks pumping liquidity into the system but such massive cash injections pose risks long term.
"As well, for the first time, 200 million people worldwide will be unemployed, so expect to see some more smashed windows. This year should still be one of capital preservation. The markets may have run beyond the fundamentals," said Mr Magnoli Bocchi.
Escalating tensions in Iran should also encourage caution, he added. "The Iranian currency is depreciating fast, money is leaving the country and it is defaulting on its payments. There is definitely something brewing in Iran."
Mark Cutis, the chief investment officer of Abu Dhabi Investment Council,described the impact of the financial turmoil in the EU this year as "brutal" for member states, and expected negative knock-on effects to flow throughout the global financial system.
"The endgame is the euro trades lower in the next 6 to 9 months and the dollar trades higher, which isn't good," said Mr Cutis. "A higher dollar means risk on around the world is not working. [This year]will be OK, 2013 will be a horrible year, as all the issues around de-leveraging come back to haunt us."
However, speakers at the conference described the Middle East as a potential positive amid the global economic gloom.
Simon Eedle, the managing director at Crédit Agricole in Bahrain, said that with a lack of clarity in Europe, emerging markets looked "very interesting", especially in the Middle East. "Emerging market bond flows were very strong last month. What quality credit we can bring to the market we could sell 10 times over."
Mark Watts, the head of fixed income at the asset management arm of NBAD said the UAE and Qatar would be the Gulf region's economic winners.
"From a fixed income perspective, disruptions like last year's Arab Spring open up opportunities. The Middle East is still attracting a risk premium due to uncertainties around Saudi Arabia and Bahrain. Investors will look back over the last 12 months and demand a risk premium," he said.
"That's something investors here can take advantage of. In fixed income as those risk premiums fall there's the opportunity for profit taking."
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