Why are Gulf stock prices falling when oil prices are hitting record highs?

Stock markets are predictive mechanisms driven by the animal forces of greed and fear. They therefore tend to anticipate future events, and are not solely concerned with the economic situation on a particular day.

How else could you explain the current Gulf conundrum of stock market crashes at a time of record oil prices? In short government revenues are surging, which has to be good for local business, and yet at the same time investor confidence is evaporating.

The problem is that investors are looking forward and saying: 'OK oil is going to $100-a-barrel, but what happens after that? Will oil consumer economies crash into recession and pull the oil price down?'

Overvalued GCC stocks

At another level it is quite clear that Gulf stock markets were too high. The Saudi market was trading on a price-to-earnings multiple above 40 and the UAE was above a p/e of 30. At these levels a retrenchment to the long term average p/e of around 15 was just a question of time.

So it is possible to rationalize the fall of Gulf stock markets at a time of record oil prices. Less easy to understand is why the stock markets of the oil consumer countries are at five-year highs with oil at $75-a-barrel. Indeed, it may be that Gulf markets are a lead indicator for global stock market trends.

Whenever stock markets fall from great heights there will be some bottom pickers who choose to buy shares at these greatly reduced prices. That is, after all, how a stock market establishes a new bottom.

However, if we look back at the 1998 Gulf stock market crash then investors might recall that it took five years for share prices to start to move off that new bottom, so there is probably no need to rush back into the market this time.

Rapid recovery

And yet the oil price conundrum remains. Many analysts believe that we are in a 15-20 year commodities bull market that began in 1999-2000, and on that reckoning any oil price weakness will just be a passing phenomenon, and the realities of limited supply and surging global demand from China and India will continue to drive prices higher.

In that case any puncture in the economic health of the Gulf States is likely to be short, although perhaps exacerbated by a real estate market correction partly a consequence of the stock market crash but also just down to over-investment in property. But this is probably just a bump on the road to a very bright future, and only speculators should beware.