Where next for the Doha, Dubai and Abu Dhabi bourses?

But what is to come next? Will large investors rally around as they did after the two substantial corrections of 2005, one in June-July and the second from November? Or will the big guys abandon smaller retail investors to their fate?

Step back a little, and try to see these markets in the context of a typical emerging stock market cycle. After the oil price crash of 1998 GCC bourses nose-dived, leaving unfortunate investors with shares worth substantially less than they paid for them.

Investors then ignored stock markets for four years, until a new oil boom was under way in 2003 which was also underpinned by economic reform especially in the real estate sector in Dubai and energy sectors in Abu Dhabi and Qatar.

Manic markets

In the language of legendary investment analyst Ben Graham the spirit of Mr. Market underwent a transformation from deepest gloom to great optimism and then even greater optimism. The once deserted trading floors of the local stock markets became crowded daily with retail investors and housewives keen to try their luck on the bourse.

More and more money flooded into the stock markets and this ample liquidity pushed share prices higher and higher. At first this helped to correct what had most certainly been undervalued shares. But gradually the momentum of investment began to be the main thing propelling share values upward, and any consideration of underlying profits was put to one side.

Of course there were warnings. Nomura Securities published a paper pointing to massive overvaluation of equities in many GCC markets just before the first correction last summer. But investors chose to buy back on the dips in the market - a classic recipe for being wiped out if the market goes against you - and this helped a shaky recovery.

What text books say

From here on the text books are very clear. Stock markets go up and when they start to head down they carry on going down. The very forces that multiple on the upside exert a negative leverage on the downside.

Moreover, simple logic ought to rescue investors; surely after making large profits the sensible thing is to take money off the table, and not risk losing everything for the sake of the possibility of a small incremental gain. The risk is all on the downside with little to gain on the upside.

Indeed, the more relevant question to ask is not where the bourses of Dubai, Abu Dhabi and Qatar are heading but how long it will take for the same forces to become apparent in the other GCC stock markets which are if anything far more overvalued. For in the world of equities what goes up must come down!