Middle East stock markets tumble, a second Asian Financial Crisis?

Today oil prices are above $70-a-barrel and record surpluses present the happy dilemma of what to do with too much money. So why should stock markets tumble?

At the time of writing this column the Dubai Financial Market was 61% off its peak value of last year, and the Saudi Stock Exchange was down by 45%. Even for markets which were the best performing in the world last year, this is a heady descent from the top.

At the human level the fall is being driven by a herd-like mentality and a rush to sell. There is also the factor of leverage. Borrowing by investors on the margin sent shares higher-and-higher, and now the automatic requirement to meet margin calls is precipitating the selling of shares at lower and lower prices.

The classic boom-to-slump cycle of emerging market stock markets is fully in evidence. Perhaps the news that housewives were becoming day traders and taxi drivers giving share tips should have been warning enough.

Great Arabian Bubble

More sober commentators like Nomura Securities told us last summer that the Great Arabian Bubble was evident, and pointed to the sky-high price-to-earnings ratios in Saudi Arabia. In the Kingdom the overall index price-to-earnings ratio is down from 40 to nearer the 20 mark; in Dubai a peak of 30 has collapsed to around 12.

So does that make stocks an obvious buy at these levels? Tempting as it might be, jumping into stocks at this stage is like trying to catch the proverbial falling knife. Waiting for a market bottom is safer than attempting to call it.

Typically foreign investors who missed out in the boom phase will now invest in the market, hoping that it will rebound swiftly. Not only could a market at this phase fall much further - and 80-90% falls are quite common in emerging markets - but a rebound could take some time.

1998 precedent

It took five years for Middle East markets to recover from their 1998 blues. But it could be different this time. The liquidity of the region is staggering at present, and the GCC current account surpluses contrast notably with the US which has its famous twin deficits and a stock market that has just past a six-year high.

However, the present strength of the oil price may yet undermine the financial health of the oil consuming nations and bring about a recession and lower oil price. That would at least provide some rationale for the behavior of Middle East stock markets today.

On the other hand, it could be that the region's stock markets rebound. Yet with most of the market's buyers nursing massive losses from whom will the buying come? A few brave foreigners will not be enough. And if this really is a second Asian Financial Crisis then global markets should follow Arabia downwards in due course.