KUWAIT CITY, 20 December 2005 — An unprecedented boom by Gulf Arab bourses, driven by skyrocketing energy prices, is set to continue at least in the mid-term, but investors should be prepared to endure some painful corrections, economists say.
“This boom is driven by oil for which demand is forecast to continue for several years. It will be sustainable at least in the next two years,” said Said Al-Shaikh, chief economist of Saudi National Commercial Bank (NCB). “Fundamental causes of the boom are still in place. It will continue to remain favorable at least in the mid-term,” Ak-Shaikh told a symposium Sunday night titled “Gulf Equity Markets: Boom or Bubble” organized by the National Bank of Kuwait (NBK).
Former US president George Bush said in a keynote address that Gulf Cooperation Council (GCC) markets are quickly evolving into more mainstream markets. “The GCC markets are no longer a collection of local, illiquid markets. Rather, the region’s markets are evolving quickly into more mainstream markets with strong deregulation trends offering unprecedented opportunities for investors to tap into regional economic growth trends,” Bush said.
Total market value of the GCC seven bourses, which stood at only $119 billion at the end of 2000, is now well over $1.15 trillion, a ten-fold rise in just five years. The value was $526.3 billion at the end of 2004.
The markets have so far this year doubled their gains with their price earning ratios being the highest in the world and twice the ratio in other developing countries, Henry Azzam, CEO of Amwal Invest, said. “We are living in a period of prosperity unparalleled in the history of this region ... More stability, less uncertainty and more regulations in the markets,” Azzam said.
The GCC groups Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). The UAE has the Abu Dhabi Securities Market and Dubai Financial Market, while the five other states have a bourse each.
Although all the bourses had a stellar performance this year, occasional corrections have sent shockwaves of a possible crash because the markets are highly overvalued, specialists said. “Some markets have run ahead of themselves ... and they will undergo some corrections,” Omar Abdallah, head of MENA capital markets at NBK, said.
Abdallah however predicted the current boom would continue longer due to huge investments expected to be pumped in the oil sector. “The GCC will become the primary global supplier of oil in 25 years ... Between $200 billion and $500 billion of investments are required by 2030,” to raise oil production capacity in GCC, he said.
These investments will reflect on all aspects of economy, raising liquidity levels even higher and eventually sustaining growth in the stock markets, he said.
With a combined daily output of between 16 million and 17 million barrels, the six nations are expected to boast around $300 billion in oil revenue this fiscal year and a similar amount next year.
Jack Mobius, managing director of Templeton Asset Management, Singapore, said Gulf markets need to increase the listing of more companies to expand their scope. “You are at the peak of a tremendous boom ... We need many more companies listed and restrictions on foreign investors must be dealt with,” Mobius said.
Saudi analyst Bishr Bakheet, head of Bakheet Financial Advisors, however warned that high prices of some stocks are not justified by economic performance and are likely to drop. “Prices of stocks of losing companies, which have increased during the current boom, will certainly dive in the near future,” Bakheet said.