Will 2004 match the 2003 Arab share boom?

The Kuwait Stock Exchange Index ended the year up 101.7% at 4,790.20 points, followed by Saudi Arabia with a 75.6% year-on-year rise to 4,432.521 points on the all-share index. Qatar was up 69%, Oman 42.1 % ahead. The 'laggards' were Bahrain, up 28.2% and the UAE up 32%.

Why the boom in stock prices in the GCC? Post-war optimism and a continuation of high oil prices (oil prices were expected to fall in 2003 but actually had their best year in two decades, apart from 2000) explain the boom. Can it continue?

There is no immediate reason why it should not. Oil prices start the year with Brent crude above $30. And it is possible that Chinese demand will compensate for the return of Iraq to the oil market this year. Geopolitical events could also support crude prices again. Opec is also far more united and proactive than in the recent past.

However, the gains in Kuwait and Saudi Arabia are not the sort of increase that is usually sustainable in any stock market. Usually markets correct when they have overshot reality and profit taking sets in. Certainly the amount of money flowing into secondary stocks on nothing more than market rumour should be a warning to even the most rampant bulls.

What is more likely is that some of the hot money now propping up the GCC's two largest bourses will begin to search for better value in other regional markets.

The two worst performing markets of 2003 - the UAE and Bahrain - might therefore be the best performers in 2004. Certainly a price/earnings ratio of 18 in the UAE looks cheap in view of the investment boom going on in the country.

Indeed, brokers say it is the availability of alternative investments, notably real estate that has held back the UAE stock market in 2003. The purchase of a 5.7% stake in Emaar Properties by a group of Kuwaiti investors in December suggests that this phenomenon may be coming to an end.

One thing that often happens in an investment boom - such as Dubai real estate - is that other asset classes such as local equities get overlooked and thus become undervalued. Look for this to reverse out in 2004.