Is it now time to sell-out of GCC equities?

In the world of finance boom-to-bust cycles are bread-and-butter. 'What goes up must come down!' is a neat way of summing up this appreciation of reality.

But when naïve investors become involved this sort of analysis goes out of the window. Such people, if they try to analyze markets at all, just draw a straight line from the past and assume an always upwards direction.

So powerful is the heard mentality, or so stupid is a crowd, that this type of thinking can carry markets forwards for sometime. One looks back to the Nasdaq boom of 1996-99 as a previous example of a stock market loosing track with reality.

There is no doubt that share valuations in the GCC stock markets have been pushed to ridiculous heights. Nomura recently published a third report on the Great Arabian Bubble which highlighted the fact that the Saudi bourse is not just similar to the Nasdaq of the late 1990s but significantly more overvalued!

However, you don't need to get technical in your analysis at this stage of a stock market boom. A little common sense is all that is required.

Consider that a boom has been running for sometime. Yes, if you had been there at the start then you would have made a lot of money. But does it make sense to come into the market late in the day and risk your capital?

The plain fact is that the ratio of risk to potential reward is stacked against you. For one thing you know that the prospect of a big gain is now small, and at the same time you know that the end can not be far away, and that means that your capital is in peril!

There are very few stock brokers who have gone on the record to say that the prospects for the latter stages of 2005 are not good. Daman Securities is one exception, apart from Nomura, and the track record of Daman Securities in its market judgment is second to none.

In June and early July the UAE bourse saw a violent 25% correction, only to bounce back to a new all-time high last week. High volatility is also a sign of a market top in any text book of stock analysis, and was evident in the Nasdaq in early 2000 before the crash.

It remains to be seen whether the GCC remains so awash with cash that stocks will defy gravity for a while longer, but stock markets do not continue to rise forever, and have arguably already gone too far above fair valuation levels to be sustainable.