Local stock markets, are they worth a punt?

So where are the Arabian stock markets today? And is this a good time to dip your toe back into this now calm, but previously turbulent water?

Dr. Marc Faber surprised some investors a couple of months ago with a prediction of a 20-30% bounce back in Arabian stocks, albeit without a chance of rebounding to previous highs. His predictive powers look as good as ever, and in the past two weeks even the bombed-out UAE stock markets have shown signs of life.

For anyone who follows Dr. Faber and took his advice well done! But beware that such a rally is frequently a false friend.

Traders return

The Gulf News newspaper recently reported the re-emergence of day traders and speculators on the floor of the Dubai Financial Market as though this was a cause for cheer. Should we welcome back the ill-informed gamblers who drove the market over the top in the first place?

Probably not, for these fickle folk will head for the exit door even faster than last time if they so much as scent a downturn coming. And you don't have to look far for potential problems.

The falling oil price is one thing; geopolitical issues that may resurface when the US Congressional elections are over in November, such as Iran's nuclear program; or the US housing slowdown that threatens a US recession in 2007.

Marc Faber's extensive studies of emerging markets also come to a very clear conclusion: a boom in one asset class will almost never be repeated immediately, and to find the next boom you always need to shift to another asset class.

Historical pattern

Look at the crash of the Dubai Financial Market in 1998-9, it took five years for investors to really recover their confidence, and then only on the back of a massive oil and real estate boom.

This is the classic emerging stock market cycle of boom and bust. It is not necessarily bad for investors. Volatility can provide exceptional opportunities for profit. It is only that the downside is just as steep and the losses equally large.

The danger in the Arabian stock markets is that we are seeing a 'dead cat bounce' or bear market rally, and that the markets have not yet found a real bottom. Certainly price-to-earnings ratios remain too high for this to be a true bottom, and that should make investors cautious at this stage.

Also there are ominous rumblings about the restarting of the initial public offering machine. Weak stock markets will only become weaker if IPOs are launched which suck liquidity from the market. Have we learned nothing from the recent crash?