GCC stock rally predicted for next year

The consensus of the MEED Capital Markets 2008 conference held in Dubai last week - as voted electronically by the delegates - was that global capital markets will continue to deteriorate, but GCC capital markets will recover earlier and decline by less, with a rally predicted for sometime next year.

That said the outlook for local initial public offerings appears particularly poor, except in Saudi Arabia where IPOs are mainly a way of distributing money to nationals, and foreigners cannot participate.

Global recession

Regional IMF director Mohsin Khan gave a global view that marked a downgrading of the IMF's recent forecast of 3% growth in GDP next year to 2.5%.

Allowing for natural population growth that puts the whole world in a recession next year, albeit the GCC will be one of the few regions to show positive growth.

However, the IMF is relying heavily on continued growth in this region, as well as Brazil, Russia, India and China to counter the downswing in the US, Europe and Japan.

Some commentators increasingly see this as unrealistic, given that the economies of the former are too small and economically dependent on the latter.

No market decoupling

From the capital markets' perspective the question is when the GCC might 'decouple' from the collapsing stock markets of the world.

There was no doubt among speakers that recent tumbling local stock markets were entirely correlated to global trends.

John H. Burbank III of the US hedge fund Passport Capital, which owns 5% of Egyptian investment bank EFG Hermes, said regional stocks were selling very cheaply and reflected modest profit forecasts, whereas for US stocks 'prices are still liars' as profit forecasts for 2009 remain too high.

Marios Maratheftis, regional research head at Standard Chartered Bank, listed the strengths of the GCC economies in an opening address to the conference, citing: Diversification and ongoing investment in infrastructure; a budget surplus to ensure projects continue in 2009 during a time of global de-leveraging; and a proactive policy response as net exports drop, with counter cyclical government spending.

Indeed, it is this ability to maintain spending when other countries are either forced to cut back or go deeply into debt to maintain spending that puts the GCC countries at such an advantage.

Counter-cyclical investment

They can invest in their infrastructure during a global recession - when costs are likely to be significantly cheaper than in recent times - and then be very well placed to cash in on the recovery phase when it comes later.

It is also worth remembering that there has never been a global recession that has not been followed by a recovery.

All the same, the immediate outlook for GCC capital markets does not look good as the global markets try to find a bottom.

Uto Baader the chairman and founder of Baader Bank, a German based securities trading company that commands one third of the trading volumes at seven German stock exchanges told the MEED conference in Dubai that he had never experienced anything like the panic of recent weeks in his long career but thought global markets had 'not more than 15%-20% to fall' to reach the bottom.

At that point it will be interesting to see what happens in the stock markets of the GCC. If the speakers and delegates to the MEED event are correct, there should be a strong rally, particularly if oil prices hit a bottom at the same time.