What will save Arabian stock markets?

Quite simply it has to be as markets that have taken a 50 per cent plus hit can not absorb another of the same size, or they would cease to exist. Indeed, this silly factoid underlines the more relevant point that markets always find a bottom.

The problem for analysts is that markets which have fallen hard often stay down for a considerable period. It took the Dubai Financial Market some five years to recover from its 1999 nemesis, for example. The Nasdaq is still less than half its 2000 all-time high.

This is largely due to the fact that market crashes eat up investors' capital and put them off investing again. So there are unlikely to be enough investors with enough capital to drive markets back up again after a crash, and local investors will always drive any market.

Oil prices still high

However, there are arguments to suggest that it may be different this time in Arabia. Oil prices are down but hardly out with the GCC states enjoying record oil incomes this year, and for 2007 who knows things might even be better.

For the supply and demand situation remains tight in the oil market, and it would take more than one small article just to list all the possible geo-political shocks.

Ample liquidity has indeed to find a home, and the number of possible homes for that cash is receding. Consider the alternatives: hedge funds look like an accident already happening; US real estate is in trouble; bond yields are low and the US dollar risk high; US equities have just reached a new all-time high, as they usually do before a fall.

In such an environment it is just possible that Arabian stocks will rebound in the absence of alternatives, provided that oil prices hold-up. Local financial markets would also get a boost if the Fed starts to cut interest rates to support the US economy, as cheap finance is usually good news for stock markets.

IPO danger

On the other hand, the queue of local IPO candidates as long as your arm is not good news for stock markets. The danger is that any improvement in market conditions will immediately release a flood of IPOs that will more than mop up liquidity, they will drain it dry.

Thus a reasonable commentator might suggest that the fate of the Arabian stock markets now actually rests in the hands of the authorities.

Will they give way to their friends eager to make a quick buck from IPOs? Or hold back the IPOs and let markets recover from their recent shocks, and at least regain part of their former valuation before unleashing the IPOs again.

Perhaps a pause and a complete re-think of the IPO process would be the best policy solution. Then stock markets will recover faster than anyone might imagine today. But nobody appears to be thinking this way.