Can Saudi Arabia and Kuwait escape a crash?

One of the most spectacular of all was the Kuwaiti Souk al-Manakh crash of 1982. In this market shares and real estate were traded with post-dated checks, and in July 1982 some sellers tried to collect on checks and found there was no deposit to draw against them.

By the end of the crash $91 billion in worthless checks had piled up and smaller investors were bailed out by the government while the larger ones went bankrupt. Indeed, the Kuwaiti government had to build a new stock market and start all over again.

Now this is not to suggest that the 95% rise in stocks seen on the Kuwait Stock Exchange this year is based on anything other than solid cash. However, it is a salutary reminder that Kuwait has seen one boom go spectacularly bust in the past; the 1998 downturn was a blip by comparison to this text book disaster in 1982.

The boom in Saudi Arabian stocks in 2004 is not far behind Kuwait, and a marked increase in market volatility this autumn is a classic sign that the end is nigh, so too is speculative investment in smaller companies largely on market rumors.

Clearly the needle that will probably prick these bubbles is a fall in the oil price. Both the Kuwait and Saudi economies are hugely dependent on oil revenues. With experts warning that Q2 2004 may see excess supply in the oil market, perhaps the die is already cast.

Those investors who wish to preserve their gains while staying in GCC stocks should consider rotation into the UAE bourse where earnings multiples are lower and non-oil growth much stronger.