Will stock market blues hit the number of millionaires in the region?

Last year was a vintage one for Middle Eastern millionaires. The 115 per cent expansion in the market capitalization of the Saudi Arabian stock market and the surge on other regional bourses had a profound wealth effect.

This compounded the impact of high oil prices and boosted the number of millionaires to more than 80,100 in Saudi Arabia, up 13.5 per cent, and to over 59,000 in the UAE, up by 11.8%, according to Merrill Lynch's annual survey in association with Capgemini.

Around 30,000 new millionaires were created in the Middle East in 2005, bringing the total to more than 300,000. This made the region the hottest place for wealth creation in the entire world.

Stock market blues

However, the bad news is that the halving of Gulf stock market capitalizations in 2006 is going to have the reverse impact this year, and some people who were feeling rather rich 12 months ago have lost their wealth in the sudden reversal of local bourses.

Merrill Lynch and Capgemini calculate their millionaire total by a formula that includes several major factors such as GDP growth alongside local stock market capitalization. So the impact of crashing share prices will be offset to some extent by surging oil prices and high oil and gas revenues.

Indeed, by 2010 the forecast is that the total wealth of regional millionaires will surge to $1.8 trillion against $1.2 trillion today, which is a compounded annual growth rate of eight per cent. Clearly then local equity price weakness is not expected to be a long-term phenomenon.

Merrill Lynch reports a tendency by emerging market investors to be more aggressive in their investments than Europeans, with interest in alternative investments and private equity very high, and perhaps this risk appetite will deliver superior performance.

Business economics

Analysts also point to the superior business economics of some locations like Dubai - with short set-up times, low bureaucracy, no taxes, non-union labor and low-cost energy - as reasons to be confident about the outlook for regional investment.

However, it could be that 2006 proves to be a blip on the decade-long stretch of rising numbers of millionaires in the Middle East. For that very risk appetite has led some investors to borrow heavily to invest in equity markets and many of those people will have lost everything.

But it says a great deal about the confidence of Merrill Lynch in the economy of the region that the US brokerage giant thinks that local investors can more than recover their fortunes by 2010. More oil revenues and a pick-up in local stocks should do the trick.