Fear rather than greed dominates Gulf stock markets

A few brave souls are now calling a market bottom and beginning to accumulate selected stocks at what appear to be bargain prices. But they are rather lonely figures, and there could yet be worse to come.

Emerging stock market cycles are notorious for their boom-to-slump performance, and this has been much analyzed. The IMF has highlighted that falls of 80-90% are typical for emerging market crashes with a bottom appearing after 18 months on average.

On this reckoning the dives seen in Gulf stocks ranging from 35-70% might not be done. Moreover, this is probably too soon to call a market bottom based on past precedent. Indeed, rapid recoveries from a large slump are virtually unknown in the history of financial markets, although a short bear market rally does often follow.

False bottom

But the danger for investors who might like to participate in this rally is that some unexpected event triggers a sudden reversal of the weakly established recovery; in short, they end up throwing good money after bad.

And you don't have to think hard to come up with possible negative events. The geopolitics of the region is almost bound to surprise again at some point in the near future. Oil prices are 25% off recent highs and could head lower, reducing liquidity.

The local booms, particularly in real estate, are due for a cyclical correction. Is it not then more likely than not that a combination of these, or other factors will take Gulf stock markets down again towards the more typical benchmark for a sell off in emerging markets?

Strong nerves

Then a buying opportunity for investors with strong nerves and cash reserves would surely emerge as the long-term future of hydrocarbon assets looks very good in the face of a permanent rise in demand from new customers, particularly in Asia.

It is always a bizarre sight to see stock markets down in a region where local economies are booming. But no more so than in the West where stock markets are booming while local economies are so clearly slowing down with the prospect of a possible recession in 2007.

In fact, if you put these two observations together then the weakness of Gulf stock markets does make sense as a forward indicator of the business outlook for 18-24 months time.

A recession in the West will be bound to topple oil prices, and that can not be good for the business and investment outlook in the Middle East's oil producers.