Can Gulf stock markets shake of their gloom in 2007?

But oil prices remain high, liquidity is strong and governments are spending. So does that mean that GCC stock markets will now rebound like Oman, and confound the skeptics?

It is technically possible as governments could direct surplus liquidity back into the stock markets. But Saudi Arabia failed to stop the market slide in the summer despite strong intervention, and it is true that once the mood of a bourse changes, governments can be rendered powerless.

The lack of a year-end stock market rally in the Kingdom and the UAE - the two biggest economies - was not a good indicator for 2007. Brokers blamed the imposition of UN sanctions on Iran but this was just another blow in a cycle of lost confidence.

IPOs continue

However, the authorities could do more. It is normal practice, for example, in financial markets to suspend initial public offerings after a crash. This prevents IPOs from draining already weak market liquidity, with the sale of existing shares to finance IPO purchases causing a downward spiral.

Perhaps we will not seriously be able to call a bottom to the current market crashes until IPOs are finally given up because the market has dipped too low for them to be possible any more. But this has not happened yet, and IPOs continue whatever the collateral damage to the markets.

But the general pattern in emerging markets following a crash in stock markets is for a long period of consolidation once the market has bottomed. This was last observed in the UAE as recently as 1999-2003 when shares remained depressed after a crash for several years despite a rising oil price and economic reform.

Internal reforms, such as merging stock markets can help the speed this process along. But even the launch of the first physical stock market trading floors in Dubai and Abu Dhabi in 2000 and 2001 took years to have an impact.

Chinese precedent

Yet we are reminded by the Chinese experience of the 2000s that a booming stock market is not a necessary condition for a booming economy; the Millennium crash of Chinese stocks did not prevent high levels of GDP growth over the past five years.

Surely the parallel with the GCC is a good one. Commodity prices appear to have entered a 14-22 year boom cycle since 2000, and while short-term corrections are possible this is the graph that really counts for the Gulf countries, not stock markets driven to overvaluation by investor overconfidence.

For if ever a society was in possession of the necessary liquidity to build for the future that would surely be the Gulf States in 2007. And indeed investment plans now run into the trillions of dollars. Eventually stock markets will decide to catch up with this reality.