Should Middle East equity investors hold-on or sell-out?

Stock market ups and downs are nothing new. Warren Buffett's favorite guru Ben Graham explained a stock market as being like a moody individual. Some days the Mr. Market was smiling and on top form, on other days Mr. Market was not feeling so good.

That means that violent swings up and down are always possible as Mr. Market can be a pretty mean and capricious guy. Clearly over the past few weeks Saudi Arabia's bourse has caught up with the UAE where Mr. Market has been feeling depressed for several months.

Hong Kong stock rescue

What goes up must come down! But it is a fact of life that stock markets seldom crash beneath 40% and that governments usually come to their rescue if they go beyond that. We saw this in the Asian financial crisis, for example, when the Hong Kong Government launched one of the most successful stock market support campaigns in history by aggressively buying shares in the top local companies.

These shares were later sold back in a booming market, for considerably more than the Hong Kong Government paid for them. It is not hard to envisage the progressively interventionist governments of the Gulf States acting in such a fashion to support domestic equities. Perhaps they might also loosen bank credit to stop panic selling to cover debts.

Now consider the position of the intelligent investor in this light. Would you then dump your shares at what will probably prove to be the most depressed levels or hold-on?

History suggests that the best action for a short-term investment that has gone wrong is to hold-on for the longer-term. Stock markets do bounce back when Mr. Market recovers his nerve and is feeling more optimistic again. Even the Nasdaq in 2000 saw a rally from the deepest levels of the crash.

Keep your nerve

If everyone around you is panicking then this is the time to keep your head. GCC governments are awash with cash and are not likely to allow their stock markets to vanish into thin air. OK they may be happy to see the more absurd valuation levels disappear but governments do have to protect their populations from bankruptcy.

Unfortunately, this does not mean that governments will ensure that all investors make a fortune from stock investments. What they can do is to cushion the pain, and stock investors are warned that once the upward phase of a stock market boom is broken it is unlikely to return, and if it does it will be very brief.