IPOs in the GCC: the next dot-com bubble?

Over-optimism among investors in capital markets is nothing new, and you don't have to search far back in history for a good example.

The dot-com boom which gripped US and global markets in the late 1990s and went spectacularly bust in 2000 is a case in point. Then huge over-confidence in the future business potential of the Internet fuelled an investment bubble in companies often with nothing more than a dot-com name and a flaky business plan.

Of course, the Internet was actually a revolutionary technology. It still is, and a few companies have made fortunes out of it. But 99% of the companies that boldly launched IPOs in the dot-com boom have gone out of business, and their investors have lost all their money.

In the Gulf region today we have a similar level of confidence in the future. This time the confidence rests on the future of oil and gas as energy resources, and the huge business potential this gives the region at a time of scarce resources to fuel global growth, particularly in China and India.

But this does not mean that any business launched in this business environment will automatically succeed in making huge profits. A few clever guys who get it right certainly will, and some of them will be the promoters of IPOs.

But the idea that everyone can suddenly get rich is always an illusion in capital markets. Something will happen to upset the party and those with cash tied-up in the market at the wrong time will find themselves the losers.

We may already be in the final stage of the regional IPO boom, where too many investors have rushed in to make it profitable anymore.

One recent UAE IPO attracted around twice the national GDP of the country in subscriptions, and the banks lending this money have had the interest on these loans confiscated by the Central Bank because such lending was held to be illegal.

This year some $13 billion worth of IPOs are coming up in the region, up from $4 billion last year. Business plans have become very thin.

The most recent IPOs for investment companies are offering their expertise to invest money on behalf of shareholders despite being start-ups with no track record of investment beyond a few names on the board.

Price-to-earnings ratios for local stocks are meanwhile in the stratosphere, and you have to wonder if the average p/e for a UAE company should be 50% higher than Microsoft.

In short, Gulf capital markets have become all about momentum investing, just like the dot-com bubble of the late 1990s.

There is no real justification for local share valuations and a significant correction is inevitable which may or may not be in time to derail the surge in IPO issues. Incidentally the rush of IPOs is also a sign that the promoters know they are running out of time.