Why Arabian stock markets have further to fall

Over the past week Arabian stock markets have given back the very modest gains of the rally that they have enjoyed since the depths of August, and have resumed their downward slide.

For markets to recover there need to be more buyers than sellers and at present there are few buyers and quite a few rather panicky sellers. The key to understanding this phase of the market is the Saudi Arabian market.

The Saudi bourse was spirited to ultra high valuation levels in the Great Arabian Stock Market Bubble of the past few years, and has therefore further to fall than say Dubai which never reached such lofty price-to-earnings multiples. And yet it is the DFM which has been the biggest faller of the two. Now it looks as though the Tadawul is catching up with Dubai on the downside.

Contagion impact

However, what is bad for the Saudi bourse is also bad for other regional exchanges. For when the Saudi share market falls then local investors often have to sell shares in neighboring markets to pay margin calls. Thus the whole region gets dragged down in the wake of the largest stock market.

At what level will the Saudi stock market stabilize? Well, the authorities did their best to hold the fall above the 50 per cent mark but this action appears to have failed.

It is tough for any government to really interrupt a falling stock market. After all more than $500 billion has been wiped off GCC stock values in 2006, close to the annual GDP of the region. Trying to stop this is like trying to catch a falling knife.

But stocks will find a new value level at which they can stabilize with a balance between buyers and sellers. At the moment potential buyers are frightened by the recent crash after such a powerful upswing, and concerned that oil prices will weaken further.

Over correction

Stock markets usually over correct on the downside and so it would be reasonable to assume that share prices have further to fall in the Middle East. It maybe that the oil price boom of the past five years is over and investors are going to want to see a stabilization of oil prices at the very least before piling back into stocks.

However, there is an important caveat about the assumption that buyers will suddenly re-emerge in droves to send markets back up: Most traders have lost money heavily and many are deep in debt, and it will be quite a long time before they are able to venture back into the market, even if they still have the will to do so.

That is enough reason in itself to believe that the Great Arabian Stock Market Bubble is over for many years to come.