Will the Arab bourses now stage a recovery?

Last year the Arab stock markets held the poisoned chalice of the world's best performing markets. This year the swing has been in the opposite direction to the bottom of the league. The champion of 2005, the Dubai Financial Market, is some 65% off its all-time high.

But what goes down must eventually go up, at least in stock markets. Dr. Marc Faber, AME Info's celebrated columnist whose contrarian views have made a few of his followers rich in the 2000s, holds that Arab markets are set for a bounce.

Local observers are more sanguine. Arab markets were propelled upwards to unsustainable levels last year by irrational enthusiasm and margin borrowing - that is borrowing to buy shares that have to be sold to cover debt if share prices fall - and part of the explanation of the extremely rapid decline is an unwinding of margin positions.

Margin trading

Margin trading was banned in the US after the 1929 crash, and some bankers think Middle East governments should now do the same. However, such leverage in markets accentuates the positive and the negative.

One simple reason to believe that Arab bourses will not recover quickly is that many of the day traders have lost all their money, and those that got out before the going became seriously bad are too scared to go back in. Certainly very substantial losses have been sustained by many traders, and some have lost everything due to margin trading and foolish investments.

Another factor is the summer trading pattern of the Middle East markets. This is a season when the rich head abroad to avoid the hot summer of the Gulf, and this year there is even less reason to get excited about stock markets.

September blip?

Where Dr. Faber could well be proved right is that in September there is a brief flurry of investment activity post-holiday. Investors always feel better for a rest, and with global stock and property markets weaker than in recent years, they may well be tempted by the idea of bargains in local equities.

Will this confidence last? Ramadan comes early this year in the final week of September, and again this is traditionally a quieter time for stocks. Moreover, October is the usual month for global stock market upsets, and recent market falls suggest that this year could hold some unpleasant surprises.

Therefore to suggest a trading bounce is likely towards early autumn may be technically correct, but the likelihood is that it will not be sustainable. Indeed, if evidence then emerged that a US recession was on the cards for 2007, then the oil price would decline and that would put the skids under Arab equities.

Alternatively, further geo-political instability in the Middle East could produce a spike in the oil price, and that might give Arab equities another period in the limelight. But how sustainable that period might be is perhaps a question to ask Dr. Faber about 2007.