Should investors now exit the GCC stock markets?

The foolish rush by unsophisticated investors into Gulf stocks this summer is now exposed as the ridiculous mass folly that Nomura outlined in its timely report entitled 'The Great Arabian Bubble'.

Stock markets have been heavily in retreat since this analysis was published, and a full-blown correction has occurred. The question is whether stocks will resume their upward march in the autumn or whether this is it for the 2005 GCC stock market boom.

Daman Securities has given its verdict on the UAE bourse: sell-up and exit shares even if you are a recent market entrant; the second half of 2006 will not be good for share owners.

The danger is investors who behaved foolishly on the way up, also will also behave like idiots on the way down. Holding shares in a falling stock market is like trying to catch a falling knife. You are bound to get hurt.

Buying back on the dips is a classic error. Timing markets is notoriously difficult, and once a downtrend is established then trying to buy to make a little on each upward bounce will catch out even the most experienced professionals.

The real problem with over-inflated stock markets - and the price/earnings ratios of GCC bourses have gone way too high - is that once the market begins to tumble it does so with a vengeance. The classic pattern is a 50% fall, 50% retrenchment, followed by another sell-off to new lows.

It is not as though this pattern is unknown. Investment analysts have seen it time and time again repeated in many different types of investment market. Human emotions are the driver of this pattern and appear highly repetitious.

Could this time be different? That is what investors always hope and a few actually choose to allow hope to triumph over experience.

However, this call to sanity is unlikely to be heard by many investors who will be so convinced of their good fortune on the way up that they just can not believe that things have changed on the way down. Few things change in life, and basic human psychology slowest of all.

Those who have taken large loans will be the worst hit in the downturn. For the loans taken to buy the shares will still be there when the shares are worth much less than they cost, and even a rich-man who borrows more than he is worth is rich no longer in those circumstances.