Why Arabian bourses are unlikely to recover much this autumn

When stock markets fall by up to 50 per cent or more, as they have in the Middle East during the first half of 2006, then it is usual to suspend the issuing of new shares.

This is only logical. For a collapse in share prices means that the demand for the available supply of stock has crashed. Putting more supply into a crashed market just ensures that it will go lower.

So why do analysts expect another two or three IPOs in the UAE and five to six in Saudi Arabia before the end of the year? Now admittedly many IPOs have been withdrawn, cancelled or postponed, but these IPOs are still going ahead and investors ought to be up in arms as they will drive prices of existing shares lower.

IPO flow

However, the institutionalized under pricing of IPOs means that money will be made by those who buy them, although a lot less than in the boom times. Not until the bourses move still lower and IPO investors lose money will IPOs finally dry up, but in the meantime they are hardly helping markets to recover by regularly draining liquidity.

At the same time the international outlook for equities this autumn has blackened. Rising oil prices on the back of Middle East hostilities and higher interest rates present a challenging environment for global equity prices with one recent survey of fund managers being the most pessimistic in 15 years.

Now what would the impact of a Wall Street Crash be on the already bombed out stock markets of the Middle East? Would they rally as money flowed back from the US into the region, or would investors take fright and exit all markets?

Crowd psychology

The classic retracement pattern in emerging markets is 80 to 90 per cent from the peak, and on this reckoning Arabian stocks have quite a way still to fall. On the other hand, if you class Arabian bourses as closer to the industrialized world then the sell-off is already overdone.

That is a pretty tough judgment call for Arabian investors who until 2006 were largely driven by the momentum of the crowd. Will they behave very differently if international markets turn sour?

Governments could, of course, still come to the rescue of local stock markets. But this would probably mean a much more interventionist approach than heretofore and there is a question mark over whether the authorities could act in time.

At the same time the spectacle of massive oil revenues - around $60 billion to $80 billion more this year than last - with local share prices on the floor is bizarre, and although profits growth has slowed in the first half of 2006 the figures are excellent.

So it might be that the bourses of the Middle East have had their nightmare and others will now follow instead but are you sure enough to put money on it? Price-to-earnings ratios are still too high to call the bottom in Arabian shares.