BREAKINGVIEWS-The Week in Breakingviews: Bridging the Gulf

By Peter Thal Larsen

LONDON, Oct 26 (Reuters Breakingviews) - Welcome back! I spent part of this week in Abu Dhabi, attending the inaugural Reuters NEXT Gulf Summit. It was a great opportunity to hear how shifting trade links, capital flows and geopolitical relations are viewed from the Middle East. As always, email me with any suggestions. If someone forwarded you this newsletter, sign up here to receive it every Saturday.

OPENING LINE

“Kering’s sale of its beauty arm to L’Oréal is the corporate equivalent of shamefacedly wiping off an expensive shade of rouge.”

Read more: Kering’s beauty sale entails apt valuation blushes.

FIVE THINGS I LEARNED FROM BREAKINGVIEWS THIS WEEK

1. American universities awarded just 327 degrees in mining and mineral engineering in 2020.

2. Citigroup’s Jane Fraser was the lowest-paid CEO of a big U.S. bank in three of the last four years, yet earned more than $100 million.

3. UK gross disposable income has risen 34% since 2019, but only 6% after inflation.

4. U.S. banks’ loans to non-bank financial institutions have risen to 10% of the total, from 3% a decade ago.

5. Victoria Beckham’s fashion company used to spend $85,000 a year on office plants.

STUCK IN THE MIDDLE

How is the Middle East faring in the New World Order? After a year of real war and trade war, it would be reasonable to expect policymakers, executives and financiers in the region to be apprehensive. Yet on a flying visit to the United Arab Emirates this week I found the mood surprisingly upbeat. The headline on the International Monetary Fund’s latest economic outlook for the region, published on Monday, summed up the state of mind. “Resilience amid Uncertainty: Will it Last?”

There are several reasons for optimism. The first is that, after two years of death and destruction, Israel and Hamas have struck a tentative ceasefire. Though much remains in flux, the hope is that the escalating conflict in the region, which saw Iran and Israel exchange missile attacks and Israel launch an airstrike on Qatar, will now subside. The second reason is that President Donald Trump’s tariff onslaught has had limited impact on a region which sends only 4.5% of its merchandise trade to the United States and whose main exports – oil and gas – are not covered by levies.

Decision-makers also see benefits in a broader realignment. Trump’s trade wrecking ball has spurred other countries to seek closer cooperation. The European Union started talks about a free trade agreement with the UAE earlier this year, while Middle Eastern policymakers hope for deeper relations with African nations. Meanwhile, Gulf states have become a magnet for rich expats from Europe and elsewhere who fear that dysfunctional politics and rising government debt endanger their wealth.

Behind closed doors, investors and executives are a bit more sanguine about the benefits of economic realignment. Diversifying Gulf economies away from their historical dependence on hydrocarbons is a decades-long endeavour. Abu Dhabi, the self-styled “capital of capital”, still sends much more money overseas than it sucks in. Venture capitalists compare the vast investments pouring into artificial intelligence (AI) in Silicon Valley with the relatively small sums being deployed locally: startups in the Middle East and North Africa attracted just $1.5 billion in the first half of the year, according to PitchBook. Investors bemoan the lack of a better-developed asset management industry in the UAE which, for all its hyper-modern airports, luxury hotels and gleaming malls, is still classed as an emerging market by most investment indices.

The other big question is whether the Middle East can maintain good relations with both the United States and China. The optimistic view is that the region can attract U.S. AI technology while also benefiting from Chinese expertise in renewable energy. At the Reuters NEXT Gulf Summit in Abu Dhabi on Wednesday Anwar Gargash, the diplomatic adviser to the UAE president, declared U.S. concerns over the region’s relations with China “a thing of the past”. But as long as the world’s two largest economies are in competition, those in the middle will have to remain resilient.

CHART OF THE WEEK

A rival television executive once dismissively compared Netflix to the Albanian army. Now the streaming service towers over its traditional media rivals. But the $526 billion company now faces a new challenge for eyeballs. Younger viewers have gravitated to shorter videos, leading YouTube to overtake Netflix in terms of content viewed on internet-connected televisions.

THE WEEK IN PODCASTS

In discussions about financial markets these days it’s only a matter of time before someone invokes the “b” word. Many see a bubble inflated by enthusiasm about artificial intelligence. On The Big View this week I talked to Edward Chancellor, the financial historian and Breakingviews contributor, about how to spot a bubble, and whether they can bring any good.

Over on the Viewsroom, the topic was the latest flare-up in trade tensions between the United States and China. Aimee Donnellan and Jonathan Guilford debated the likely consequences of the fight over rare earths and computer chips with Robyn Mak and Gabriel Rubin.

PARTING SHOT

Trade war and deglobalisation might seem inauspicious for an American clothing brand seeking new fans in China. Yet that is what Ralph Lauren RL.N has done. The purveyor of polo shirts and cashmere dresses has doubled its revenue in the People’s Republic over the last three years and expects double-digit growth in its top line for the next three. While U.S. brands from Starbucks to Nike struggle in the world’s second-largest economy, Ralph Lauren has proved there is still an appetite for the brand which fashion guru Diane von Furstenberg once described as “American as Coca-Cola”.

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