GCC stock markets heading for a fall

There are plenty of other reasons to see the share price spikes in Qatar and the UAE as in the final stages of their life.

Volatility for one thing; shares on the Doha Securities Market were up 13.3% last week, but the week before saw their biggest ever fall. IPOs are also now failing to retain their launch prices, as buyers of Naqilat can testify.

Both the stock markets of the UAE and Qatar and to a great extent the rest of the GCC have become self-feeding.

If you look at recent record profit announcements you will find that maybe half of the record 'profit' is actually down to share trading; in other words the profits that are driving the market are being produced in the market itself.

This obvious bubble can not last for long. It has also reached the super-inflation stage. Qatari stocks are up 98% in the less than four months of 2005, and the UAE is not far behind at 75%. Saudi shares encountered some volatility last week and fell by 7.7% but are still up 33.6% on the start of the year, and the Kuwait Stock Exchange is up by 33.6%.

This is not to say that GCC stocks do not have good reason to rise at the present time. Oil revenues are at record levels. Governments are adopting economic reforms across the board. The private sector is booming. But nothing can justify the sort of huge increases in stock market valuations seen this year.

Indeed, there will be a random, unexpected event to prick this investment bubble. Buyers in local stocks are now in the territory of the 'greatest fool', always hoping that they can sell out at a profit before the crash comes. History suggests that the greatest fool is anyone trading in the market at the top of the market.

What could undo such a marvelous investment party? Probably a repeat of the 1998 Asian crisis, but in a more global context; imagine a crisis in global capital markets and how this would immediately impact on the oil price and bring investor sentiment crashing down to earth.

You only have to look at the performance of global stock markets over the past two weeks to realize that this is becoming a probable rather than an improbable scenario. And ask yourself one question: 'When did an oil price spike ever fail to cause a recession in the oil consumers?' Answer: 'Never'. Caveat emptor!