Difficult outlook for Arab stock markets

A few lonely investors can still be found in the trading halls of the Arab stock markets but trading volumes are up to 90% down and life for the region's bourses is very quiet, rather like it was a few years ago before the madness began.

Rather late in the day the respective authorities have launched measures designed to shore up confidence in local markets. In Saudi Arabia the bourse has been opened up to foreign buyers for the first time, and not surprisingly after a 30% crash there are very few expatriates interested in buying stocks.

Qatar has taken the more obvious step of holding back future initial public offerings to try to maintain liquidity, and the UAE delayed a rights issue with the same intention and also eased borrowing restrictions for share purchases.

Liquidity crunch

However, with Gulf stock markets alone having soared in total value to well past the one trillion dollar mark, there is a limit on what the authorities can do. Even the $150 million oil surplus expected for the record year 2005 is a drop in the ocean compared with such a figure.

A few optimists continue to hope that the Arab stock markets will rebound spontaneously, but there is little historical precedence for a spectacular recovery from such a crash. Indeed, many technical analysts think the markets still have further to fall.

IPO planners remain bullish about their prospects but market realities tell a different tale. Recent new stock issues have dampened liquidity in the market and taken share prices lower.

Surely it is the IPO system itself that clearly needs reform and a break in new issues until that is done would allow markets to consolidate around a new base rather than risk depressing them further. In particular, IPO issue prices should be set by market forces, as on the new Dubai International Financial Exchange for example.

IPO alternatives

Indeed, corporate financiers should be looking at alternatives to IPOs such as corporate bond issues or Islamic sukuks. Raising money through IPOs is not the only method available, and equity issues can prove expensive in terms of future dividend payments, especially when sold for a sub-market price.

In the meantime, the recent crash of Arab stock markets will cause a slowdown in new projects and an end to some of the more outlandish schemes.

Perhaps the stock markets have actually delivered an important message: that a region can only absorb so much investment at one time and that saturation point has been reached. This is an end to the inflow of post-9/11 cash that has propelled local markets to overvaluation, and the correction phase will now roll-out.