Good reason to expect further weakness in Arabian stocks

The stock market in Saudi Arabia is now down 67 per cent from its recent all-time high, a thumping crash by any reckoning which can be set squarely against three factors: a 35 per cent fall in oil prices since last July; irrational exuberance on the part of investors; and a persistence with initial public offerings which made the crash worse by draining market liquidity.

At least the trap door has been largely closed on IPOs though not until one of the last issues opened at below its sale price. IPO promoters still optimistically raise hopes of further issues although the sudden cancellation of last autumn's IPO conference should have sent a message to the market.

But with Saudi Arabia's shares down by 12 per cent to date this year, there could still be a bit further to go until the market hits rock bottom. However, clearly the market now has less room to fall than it did.

Falling markets

Stocks in the UAE and Qatar have fallen by 50 and 48 per cent respectively from recent all-time highs, with the UAE gaining a little ground in 2007 so far and Qatar falling back slightly. These markets have both suffered from Saudi investors cashing in their shares to help deal with problems in their own bourse.

So far this contagion effect has not spread to Kuwait, Bahrain and Oman to anything like the same extent, with shares only down by nine, 14 and 21 per cent respectively from their all-time highs.

Whether this gravity defying performance can be sustained is a moot point, and if energy prices continue to weaken it is hard to see how these bourses can remain aloof from reality. They have also enjoyed oil boom increases and logically should be penalized in the downswing.

More pain, less gain

Thus it is hard to believe that the Great Arabian Bubble is fully deflated yet. Saudi Arabia has clearly led the way with its 67 per cent slump in stock prices. Other markets could well have further to go down before a new bottom is reached.

And once the stock markets do hit a bottom do not expect investors to suddenly pile back into the market. This is simple psychology: having lost money on something, you do not rush to put more money at risk.

Expect a long sideways move until something happens to revive interest in the Arabian stock markets such as a renewal of high energy prices.