Is the Middle East stock market rally over?

Disappointing results from Saudi Basic Industries triggered a 7.5 per cent fall in the benchmark Tadawul index on Sunday, and there was a futher 4.1 per cent correction on Monday, leaving the index eight per cent down so far in 2008.

Fundamental analysts pointed to the impact inflation was now having on corporate earnings, and what this meant in terms of the overvaluation of shares based on expectations of rising profits.

Technical analysts noted that the Saudi bourse has now formed a double-top, the classic indicator of the start of a major correction phase. Whether this will mean a retracement to the previous 12-month low of 6,862 from yesterday's 10,699 is a matter of conjecture.

Oil price falls

Oil prices have also fallen back sharply from $100 to $88 and are always a barometer of Saudi stock market health. Indeed, the correlation between the Saudi bourse and the oil price is very strong.

This tends to knock away the argument that the GCC stock markets are not correlated to Western markets. Quite clearly local bourses are correlated to the oil price and the oil price is correlated with the strength or weakness of Western economies.

Over the past week fears of a US recession impacting on global oil demand have dented oil prices, and so the idea that regional bourses are immune from a global economic slowdown is ridiculous.

It also has to be said that optimism about the local outlook for 2008 was so strong at the end of 2007 that all the good news was written into regional stock prices. In short, it needed only a little negative news to swing the market in the opposite direction.

Bearish trend

Once a new downward trend is established it becomes very hard to reverse, although the volatility in the ups and downs can be dramatic. But a falling or bear market means that most participants are losing money and not making it, particularly as there is no short selling in Middle East capital markets.

Could markets now revisit their previous lows set by the 2006 crashes? In emerging market stock market cycles a strong rally after a crash is frequently observed, fuelled mainly by foreign buyers who missed the first share boom and think they know better than the more cautious locals.

Equally this rally is frequently undone before the market achieves a true bottom with all the participants giving up. Middle East stock exchanges have a long way to fall if that proves true, and will follow global equity markets lower with the oil price, with their new foreign shareholders rushing for the exit door.

See also:
How the Wall Street gloom affects the Middle East
Saudi bourse opens up to foreign investors