A stock market crash does not undermine excellent business fundamentals

Stock market crashes - and by any definition the collapse of stock values across the Middle East this week is a crash - occur for two main reasons: either speculation has got out of hand or something fundamental to business changes.

This week's crash is down to overvaluation and speculation. Nothing has changed to alter the excellent business fundamentals in the Middle East. The oil price is at a multi-year year, and not under threat. There is huge investment in new infrastructure and real estate projects. And liquidity remains strong.

Other factors like a youthful population with high aspirations, huge hydrocarbon reserves and a commitment to economic reform are still in place. This is a great environment for business, and new businesses are opening every day in the Middle East these days.

Real estate to boom?

Dubai immediately countered a record collapse in share prices on the Dubai Financial Market by issuing a long-awaited Property Law that legalizes real estate ownership for foreigners. This is the last part of this highly significant economic reform, the opening up of the local real estate sector, and will be positive for the sector.

Indeed, it may be that money that would have gone into stocks will now go into bricks-and-mortar, and those investors who sold in the stock market this week may well choose to put their money into real estate. Certainly the precedent of other stock market crashes is a boost to the real estate sector, at least for a period.

Middle East investors will also start diversifying their portfolios in different directions. Hedge funds are a likely beneficiary, so too holdings of European and possibly US equities, particularly with a myriad of foreign financial institutions now setting up in the Dubai International Financial Centre and Qatar Financial Centre.

Forex and gold

In addition, online trading of foreign exchange and equities will get a boost, particularly with online forex companies such as ACM now setting up a representative office in Dubai. Expect too to see more activity in gold trading, especially on the Dubai Gold and Commodities Exchange; and enthusiasm for local private equity funds.

In fact, for the foreign institutions establishing a regional presence now, the collapse of local stock markets could not be better news. Local investors are not likely to share this sentiment, having lost a great deal of money, but at least many new avenues of investment are now open to them, offering the chance to get back at least some of what they have lost.