What does the future hold for Arab stock exchanges? [Archives:2006/961/Business & Economy]

July 3 2006

Moneer Saif
The golden era of Arab stock markets has come to an end. Shares across the Middle East stock markets continue to fall and, as every attempt to lift them comes to nothing, they continue to lose the trust of their investors. Is this normal correction or are these signs of a collapse?

Some analysts blame the weak markets on investors, who panic and then sell off shares, while some point directly to the management of the Arab stock exchanges. I hold that this pattern is simply normal correction and that markets could well rebound, but that it will take time for the trend to be reversed.

During the last two months many retail investors bailed out of the markets, causing tremors to spread among those who remained. Institutional investors were also left behind. Indexes in most Gulf countries, Egypt, Lebanon, Jordan and Morocco have declined, leaving high-profile investors in a state of disarray, waiting to get out with as much as they can salvage. After four years of rocketing growth, markets everywhere in the Middle East have been severely weakened in just a few months. Also adding to concerns is a continuing lack of emergent buyers alongside the constant rate of selling.

As the crash began to take shape many Saudi investors escaped local markets to invest in other emerging economies such as India, China and Europe. Others chose to begin investment in real estate, viewing this as a safer strategy. These investors often find it difficult to return to their home markets, causing stocks to remain low and thus creating a vicious circle of decreasing wealth and stability. Such a situation will take months to improve, if not longer.

Why are Gulf markets continuing to slide?

If one takes a look at the economies of the Gulf States, there is evidence of huge corporate profits, trade surpluses and generous government budgets. As reported by some investment banks, profits in the six monarchies of the Gulf Co-operation Council rose by 31% in the year to the first quarter of 2006. Despite being somewhat slower than the previous year's growth of 63%, this figure is still impressive.

With such positive indicators in mind, the following list of problems faced by the Middle Eastern markets seems hard to justify:

(1) The inexperience of management bodies in such areas.

(2) Mismanagement resulting in the weak regulation of markets.

(3) The absence of powerful market traders in comparison to smaller investors.

(4) The trading on Gulf markets being limited largely to residents and governments, restricting investment by foreign traders. This in particular prevents cash flow to the Gulf and other Arab markets which could help strengthen their respective economies.

Despite current difficulties, such as the lack of confidence from investors, there is still hope that Middle Eastern stock markets will soon begin recoup their losses. Such a recovery needs to be steadily maintained, with investors and businesses avoiding rapid and unsustainable surges that threaten to destabilize the situation even further. A predicted rise in oil prices will give many observers reason to hope for improvements to the Gulf economies. Such a boost would enable them to withstand this financial impasse and plan for stronger markets in the future. Most crucial for securing a lucrative stock exchange however, is the increase of foreign investors to the Middle East. If this could be achieved there is every reason to foresee a positive time ahead for Arab markets.