Bearish mood prevails at capital markets conference

Perhaps the most senior forecaster was the eminent regional economist and Chairman of the Dubai International Financial Exchange, Dr. Henry T. Azzam.

His verdict was 'an early return to the bubble conditions (in local capital markets) is highly unlikely'. And that he was 'not sure if markets had yet hit bottom'. The best Dr. Azzam could offer was 'an extended period of consolidation and side-wards trading'.

Veteran UAE stock-watcher Suresh Kumar of Emirates Financial Services said 'things might get worse before they get better' and agreed that it could be some years before markets recovered.

2007 outlook

For 2007 Dr. Azzam said to watch-out for a weakness in the global economy which would depress oil prices and then local real estate. And he produced a graph showing how oil prices and Saudi stock market prices were strongly correlated.

However, this pattern of stock market exuberance followed by a plunge into despair is a phenomenon well known by analysts, as Dr. Azzam pointed out. He highlighted the case of China where the stock market fell 60 per cent from its peak in 2001 and then flat-lined for three years, despite having an economy with eight to nine per cent growth throughout this period.

That the GCC countries are experiencing high levels of economic growth due to the Third Oil Boom is not in doubt. The IMF forecasts a 24 per cent surge in non-inflation adjusted GDP to $800 billion this year and another 10 per cent growth next year.

But stock markets look ahead, and falling rates of growth are not sufficient to maintain exponential rates of growth in capital market values. The tendency is for markets to overshoot on the upside and under perform on the way down.

Fair value

Dr. Azzam marshaled an impressive array of valuation indicators for the Middle East markets which tended to show that values were now approaching a 'fair' level. The problem for investors is that this probably indicates that values still have further to fall until they are undervalued.

That will be the signal for investors to become interested again. But as many of the speakers at the MEED Capital Markets Conference noted, there is always a gap of some years before markets recover their nerve and investors recoup a part of their loss.

The subject of IPOs was debated fully on day two. But the role of recent IPOs in draining market liquidity and deepening the extent of recent stock market crashes was barely mentioned. And the failure of the latest Saudi IPO to reach its issue price on its first day of trading was not addressed as a reason for postponing future planned IPOs.

At times it seems the capital markets still live in a place somewhat removed from basic realities.