How low can Middle East equity prices go?

The Asian economic crisis of the late 1990s was somewhat different to the malaise that has afflicted Middle East capital markets this year.

In Asia the pain was felt first in a run on regional currencies, and then a collapse of share prices and a real estate crash. In the Middle East US dollar linked currencies have held firm, and with huge flows of petrodollars seem as strong as ever. Only if the mighty US dollar itself weakens will devaluation become an issue for the region.

However, the contagion of share price collapses does bare some superficial resemblance to the movement of share price crashes through the Asian markets from Thailand up to Taiwan during 1998. Certainly it appears that a share price fall in Saudi Arabia will be followed by weakness in the UAE and even as far away as Jordan.

Regional interconnections

This reflects the interlinking of investment funds, and the important role of Saudis, Kuwaitis and emiratis in all the regional markets. However, this also begs the question: are we going to see share values collapse in the fashion seen in the Asian financial crisis?

Given that the role of international investor is small in the Middle East, while they played a very significant part in hyping Asian markets in the late 1990s, this does not seem very likely.

Middle Eastern governments are also far more cash rich than were many of the Asian countries, thanks to five years of high oil prices. Liquidity remains strong and so does the economic outlook with high levels of domestic investment.

Over investment symptom

On the other hand, the same kind of over investment seen in the Asian countries in 1998 is also visible in parts of the Middle East these days, with easy-money invested into projects that would normally not go ahead. This is resulting in overcapacity in certain parts of the economy - just as Thailand had too many hotels and apartments under construction.

Stock market crashes at the very least are a reality check for local business, and act as a break on business activity. The release of projects will slowdown as the ability to raise capital through initial pubic offerings falters and business confidence falls.

Whether this crosses over into the real estate sector is a moot point. Sometimes, as in the Asian example, the impact on the real estate sector can come quite quickly. In other examples of stock market crashes there is a reallocation of capital to real estate which actually boosts the sector for a period.

Given all the real estate projects that have been launched in the past month, this does appear to be the case in the Middle East right now, and the flow of funds into real estate should help to support local business confidence, and perhaps ensure that the stock market bottom is less deep than might otherwise be the case.