How will GCC capital markets move next?

There is one reason for this optimism: oil money. Excess liquidity attracts financial professionals like bees to a pot of honey. Yet they had better hurry up because markets may just get on and move without them.

Certainly the IPO fever sweeping Saudi Arabia and the UAE at present shows that capital markets are very much in a boom phase, and may be going over the top.

Oversubscriptions of 100 times in the case of Ettihad Etisalat in Saudi Arabia and 35 times in the case of Abu Dhabi's Addar Real Estate Company are phenomena that need some explaining.

What is happening in these cases is that banks are lending huge amounts of money to enable local citizens and institutions to 'stag' the IPOs. That means buying IPO shares at a discount for a quick re-sale.

The problem is that shares are allocated on a pro-rata basis, and thus each applicant gets only a tiny fraction of the shares that they apply for in the final allocation.

Meanwhile, they have to pay the interest, or profit for Islamic loans, on the whole amount borrowed while it is tied up in the IPO process. So at the end of the day the profit on the share sale may just cover the cost of capital.

The winners, step forward gentlemen please, are of course the promoters of the issue, often the same banks lending the greedy public the money to buy the shares.

We have seen this all before. In the NASDAQ technology bubble it was the banks that organized the IPOs that made the real money, and certainly they were the only ones left in the black when the bubble burst.

To take this parallel further, the present GCC IPO fever is also tending to suck the life out of existing local stocks, as investors cash-out of those shares to pursue what they think will be higher gains in the IPOs. The NASDAQ did the same to the Dow Jones Index.

In short, we have an investment circus that will eventually collapse under the sheer weight of speculation.

How long it lasts is more difficult to predict. The NASDAQ managed several good years for investors. But there are further alarming parallels between current market conditions in GCC capital markets and the NASDAQ.

For one thing, many of the recent IPOs have been for companies which have not really finalized their business plans, let alone delivered a profit. So you are just buying a name on trust.

Of course, the company may deliver on its promise. Emaar Properties of Dubai is now the region's biggest listed real estate company but was once just a start-up with a good idea in 1997. However, that did not stop massive speculation in its shares after the IPO which later crashed ruining many investors.

Another parallel between today and the NASDAQ of the 1990s is the blind confidence of investors. This is the madness of crowds, or popular delusion as psychologists term it. Just because a large number of people agree on something does not make it the right thing to do.

Indeed, if you look for indicators to suggest when capital markets may be at, or nearing their peak, then this is exactly the sort of phenomenon that has been seen time and time again.

Volatility would be the next one to watch for, with markets rising and falling but never quite regaining their peaks. But we could see further waves of euphoria sweeping the markets before then.