More Mobility, Same Safety

Judging from where we are in the current historical cycle, global mobility is necessary. We feel Dubai is increasingly benefiting from its safe-haven status as the Western civilization enters a cycle of social and geopolitical instability. And yet mobility as a lifestyle has not really changed the ways to protect and grow wealth, in both infrastructure and investment choices. The Old Continent retains the crown of safest custodial jurisdiction, with Singapore right behind. In investment terms, real estate continues to dominate. Fixed income is still perceived as the safest asset class, only second to real estate. Equities will never shed the erroneous association with short-term speculation and high volatility. Private debt and equity markets are in vogue, but remain a small allocation and very correlated to listed markets.

History, life’s teacher

The basis of our investing approach is the study of history. The underlying reason is that all the events we experience throughout our lives have happened at some point in past generations. As Roman lawyer and politician Cicero used to say, history is life’s teacher. With that mindset, we see the world in terms of historical cycles. Cycles can be defined as a succession of ages where needs are addressed and goals reached by a group of organized peoples. The more organized, uniformed around the same values, and with a unitary aim people are, the closer we get to the definition of a civilization.

The cycle in which Western countries find themselves today is one of an ending, although extraordinarily long, peace time. The Pax Americana that began in 1945 is closing as we write. During these 79 years, the global economy has experienced unbelievable development, the average quality of life has rocketed to unimaginable levels, technology has propelled the human race beyond planet Earth. And yet the first signs of a cyclical turn have appeared. The rise in geopolitical instability and localized wars is consistent with a cyclical turbulence that many civilizations have experienced before. Remember, extended periods of peace will eventually be interrupted by conflict, and vice versa. For reference, the longest peace time observed was 100 years.

This turbulence is also felt in political elections. A strong and increasing social polarization is emerging in Europe and the USA. As economic growth cools down, attention moves to wealth inequality, taxation, and state assistance. These encourage comparisons that can easily become confrontations. Emerging economies are not experiencing exactly the same challenges, but any economic trouble can turn into chaos.

Living in current times requires geographic flexibility. In this context, the wealthy have been on the lookout for the optimal business and lifestyle places.

Geographic mobility, investment immobility

We see Dubai growing in its status as a safe haven from the turbulence of both Western and emerging democracies. The inflows have been mainly Russian, Ukrainian, Chinese SOEs, British, European, Latin American, and Swiss. Each one with its own reason, they have all sought refuge in the safety of our Emirate.

The safe haven play is not new or unique to Dubai. Switzerland was a safe haven during 500 years of war in Europe, Hong Kong was one during the implosion of the Qing dynasty in the late 1890s and later on during the Maoist Cultural Revolution of the mid 1960s, and Singapore was one during the years of Mahatir in Malaysia, Suharto in Indonesia, and Marcos in the Philippines — dictators who could expropriate capital at their whim.

Despite this obvious trend in mobility, a caesura persists in the way wealth is protected. Custody of all types of assets continues to happen in Europe, and in Singapore, as both jurisdictions retain their historical institutional strength. This reality tells us that the global political instability has not affected the financial infrastructure, which is of course a positive sign. As long as the safeguarding of capital is not put into question, wealth will not move.

From an investment angle, preferences have not changed much over the last decade. The bulk of profits from successful entrepreneurial efforts is usually invested in real estate. Private markets in both debt and equity might be attractive, but poor liquidity limits the amounts allocated and perfect correlation with listed markets will never disappear. 

Fixed income remains the first choice among asset classes, based on the sometimes erroneous conviction that bonds cannot bankrupt. Higher yields have effectively resuscitated this asset class, with returns now competing with real estate rent yields and equity growth yields.

Lastly, listed equities have had great success over the past 10 years, but markets remain chronically open to the constant boom and bust cycle dictated by differences between expectations and fundamentals — we are in such an optimistic stretch in US equities today. Because of recent successes and large valuation swings, the asset class remains associated with short-term speculation, which can render long-term investing unappreciated.