GCC stocks, where to invest now?

Last week Kuwaiti stocks had their biggest fall in three weeks as investors took profits after the weekend suicide bombing in Saudi Arabia.

Over the week the main index lost 70.60 points and closed 1.6% lower on the week. This still leaves the Kuwait Stock Exchange 85% up on the year to date.

The region's No1 bourse, Saudi Arabia, has also witnessed falls this autumn and is off its best. Some brokers feel both the No1 and No2 markets have got a bit ahead of themselves, and while the end of the Iraq war and high oil prices are reasons for business optimism all this exuberance may have become somewhat irrational.

Indeed, excess liquidity in the Arab World has chased some stock prices to unsustainable levels. The worse example is Egypt, up by 150% in the past year, which is surely just waiting to tumble.

However, the UAE, Bahrain and Oman markets have been more subdued performers with the UAE showing just a 31% gain. This is paradoxical because the one country that is investing its new oil wealth into productive assets is the UAE, vis-à-vis the investment boom in Dubai development projects and real estate.

Thus it would be logical to expect investors to bail out of overvalued Arab markets and search for better value in the UAE. In the Emirates price/earnings ratios average 17.5, around half of Kuwait's bourse, and yet it is hard to see why Kuwaiti companies should be twice as valuable as those in the UAE.