Have GCC stocks hit the bottom?

It could be that the elevated oil prices of the past couple of weeks during the UK sailor detention crisis has reminded GCC investors that oil revenues remain close to record levels in the Gulf and that the outlook for most businesses is still very good.

Certainly the recent 60 per cent or more falls in stock indices in the UAE and Saudi Arabia, and a lesser fall in Kuwait, should give markets a cause to pause and reflect: is it really this bad? After all Wall Street stocks are close to a record high, are things really so awful in the Gulf?

However, while it maybe true that Gulf stocks have fully discounted a possible future correction in the oil price, which has yet to be seen it has to be said, they have also correctly priced in a potential conflict between the US and Iran, a geopolitical event that Wall Street is just ignoring, unlike the 2003 arms build up on the Iraqi border.

War impact

Gulf businessmen and women fear the impact of a conflict with Iran on trade, tourism and real estate; and even the possibility of physical damage to oil and gas infrastructure.

They also note that high oil prices would mean little if the Strait of Hormuz was blocked and physical exports and therefore revenues ground to a halt. They know governments would do their utmost to mitigate the damage to local economies but this would not be entirely effective.

It might be felt that after the UK sailor detention crisis of the past couple of weeks that tensions in the Gulf have lessened. But that surely misses the point that this incident shows just how close to the edge the military situation has become. The US has a powerful assembly of battleships in the Gulf ready for any eventuality, and understandably this makes Gulf investors nervous.

Market bottom

On the other hand, if the situation with Iran over its nuclear ambitions could be resolved then this surely would be a signal that Gulf stock markets had bottomed out. But until fear in the market can be replaced by greed then the GCC bourses are likely to remain depressed and not move beyond a brief summer rally.

For the general pattern of emerging market bourses is one of relatively short periods of out-performance and irrational enthusiasm followed by long stretches of near moribund markets. And this flat-lining of markets can happen even when the fundamentals are improving, as in the Gulf markets from 2000-2003.

Nonetheless, buying into markets that you know will eventually recover and waiting patiently for that recovery has been a successful investment strategy since the dawning of history.