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French Version

Dip in Gulf stocks is 'healthy' correction

Analysts say decline is necessary adjustment for overvalued markets

Gulf stock markets, which have made unprecedented gains over the past five years, are witnessing a "healthy" correction needed to take the steam off the overvalued markets, analysts said Sunday.

All five major bourses in the Gulf have now dipped below their 2005 closing, shedding some $200 billion of their capitalization since the start of the year, and pushing investors in some countries to protest.

"Yes, this is a healthy and needed correction. It will not be fundamental and long-term, ut rather short to mid-term," leading Kuwaiti economist and head of Al-Shall Economic consultants Jassem al-Saadun said.

"Though its difficult to predict the duration, but as long as the financial and security situations continue to be good, there is no cause for panic," Saadun said.

However, investors in Saudi Arabia, which has the largest stock market in the Arab world, and Kuwait have panicked. Small investors in Kuwait protested Wednesday after the index made the biggest single-day loss.

Gulf bourses have made huge gains during the past five years without any real correction.

Total market value of the GCC's seven bourses, which stood at only $119 billion at the end of 2000, grew to $1.146 trillion, a nine-fold rise in just five years.

Turnover also surged by 148 percent to $1.368 trillion from $552 billion in 2004.

Last year alone, the Dubai Index rose 132.4 percent, followed by the Saudi Tadawul All-Share (TASI) which gained 103.7 percent.

The Kuwaiti index rose 78.6 percent, Qatar by 70.2 percent, while Abu Dhabi increased by 69.4 percent.

The markets of Oman and Bahrain rose by 44.6 percent and 23.8 percent, respectively.

TASI, which peaked at 20,634.86 points on February 25, has shed some 20 percent since then and on Sunday dipped below the 2005 close of 16,712.64 points for the first time this year.

In the process, TASI lost over $100 billion of its capitalization which came close to $800 billion during its peak. Its value at the end of last year hit $660 billion.

"The problem of the Saudi market is structural. The number of listed companies and the quantity of shares on offer are very small compared to plenty of cash," Saudi economist Abdel-Aziz al-Daghestani said.

"This has created a situation in which plenty of cash is chasing small quantities of shares, making stock prices to be highly overvalued," Daghestani told AFP.

He predicted that the Saudi index will continue to fall.

The U.A.E.-based Shuaa Bank expected in an analysis the Saudi market to shed between 25 percent and 40 percent over the next six months before rebounding by the end of the year.

The indices of stock markets in Dubai, Abu Dhabi and Qatar have dived between 15 percent and 17 percent since the start of the year, but each has lost more than 30 percent of their all-time highs recorded late last year.

The Kuwaiti Stock Exchange Index is currently five percent below its last year's close but down 10 percent of its all-time high set on February 7.

Together, the four markets have lost about $100 billion of their capitalization since the start of 2006.

"Gulf states had entered a period of tremendous economic expansion that pushed prices [of stocks] very high, driven by a sharp increase in oil revenues," Saadun said.

He said that some companies, whose prices had been inflated without justification, will lose between 50 percent and 60 percent of their prices, but well-established firms will see a much smaller slide.

Gulf and foreign economic experts told a symposium in Kuwait in December that although Gulf bourses were set to keep booming, supported by energy-driven prosperity, investors must be prepared to endure some painful corrections.

Beirut,03 13 2006
The Daily Star
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