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The trials and tribulations of the Gulf region's stock markets

Stock markets across the Arabian Gulf region realized substantial gains since 2002. During this same period most of the world stock markets were either underperforming or suffering losses. In 2004 the stock market index rose by 24 percent in Oman, 50 percent in Saudi Arabia, and 88 percent in the U.A.E.

Investors got used to double and often triple-digit returns within a short time, so when a modest correction occurred in Qatar in the second quarter of this year followed by a fall in the U.A.E. markets starting mid-July, there were cries of foul play and demands for government intervention.

Analysts talked about an Arabian bubble comparing it to the dotcom bubble and some economists warned of detrimental implications for the whole economy.

Almost a month into the downward correction, the business outlook for the real economy remains positive due to excellent regional economic fundamentals; high oil prices, economic reform, a boom in real estate, and massive liquidity.

The dust is settling and markets are consolidating. So where do investors stand now and how can one evaluate this experience?

For the last two decades GCC investors have been investing heavily in the world's financial markets providing the capital requirements for corporations across the globe. Since 2002 a substantial chunk of this capital returned to the region due to two major reasons; the feeling of unease about the tightening of financial controls in the West following the events of September 11, 2001, and the slowdown in stock-market performance in the developed countries.

This combined with a strong macroeconomic growth, positive budgets, and trade surpluses, the GCC region became awash with liquidity that trickled down to corporate performance. What followed is a phenomenal increase in the combined GCC market capitalization from 48 percent of GDP in 2002 to 170 percent on July 2005.

Besides the institutional Arab investor, this strong and dynamic domestic market attracted a new kind of player. Small retail investors including housewives, teachers, small employees and students joined in to take advantage of an over inflated stock market with a hardly believable price/earnings ratio reaching 47 in the U.A.E. in March 2005.

A new culture was born. Television stations started running daily specialized programs. On major Arab satellite news channels we saw the appearance of the famous ticker tape stating the updated price of the major Arab companies. The language changed and people started giving nicknames to companies.

There were scuffles in Saudi Arabia during the recent initial public offering of Bank Al-Bilad, a floating that attracted half the kingdom's native population. The Aabar Petroleum Investments startup IPO was 800 times oversubscribed, attracting applications totaling an amount that topped the U.A.E.'s Gross Domestic Product.

So the brouhaha we heard upon the first downward correction does not come as a surprise.

Professional investors understand that the pace at which the share prices rose over the last few years could not be maintained. They were expecting a correction in markets, and these investors know how to buy to make a small profit on each upward bounce once a downward trend is established.

Small investors who were caught in the stock market euphoria and have taken loans to buy shares face the highest risk, especially that despite booming regional economies, the interest rates are rising. The GCC interest-rate movements track those of the U.S. rates and these rates are foreseen to increase in the near future.

Some are bound to get their fingers burned by stock market corrections; nevertheless GCC markets still have strong potential for future growth with their huge oil reserves and in view of the high oil prices forcast for the coming decade. It is still a good time to invest in the GCC markets.

It would be good if this correction brings about a certain lacking maturity to the market and forces GCC private investors to carefully study their options instead of buying on pure speculation basis. Regulating authorities could help by requiring that start-ups or Greenfield companies provide sufficient disclosure material in their prospectus including detailed financial data and projections, instead of mere promotional material.

Beirut,08 29 2005
khatoum Haidar
The Daily Star
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