A majority of Gulf bourses have recovered in the second half of 2010 despite harsh expectations regarding economic condition and the possible impact on markets. However the recovery has varied. It's only the Emirates Securities Market, which is still suffering some decline for a variety of reasons.

We had in the first quarter of last year pointed out in this column the possibility of the recovery of the Gulf Cooperation Council stock markets.

Reports indicate that the market indices of the other five Gulf Cooperation Council (GCC) countries increased in varying rates. The Qatar index jumped by a rate of 25 per cent, the highest among GCC countries. Saudi Arabia and Muscat bourses followed with a healthy eight per cent rise.

At the same time, global financial markets, such as in London and New York, also achieved high growth rates, with 17 per cent for Nasdaq and 14 per cent for the London's FTSE. India's Sensex recorded the highest growth rate in the world with a 30 per cent surge.

Previously, we discussed the reasons for the huge decline in Gulf financial markets during 2008 and 2009, at a time when the stock prices were cheaper than their nominal rates, a rare occurrence that does not represent the power and stability of Gulf economies.

Despite the bourses of the five GCC countries overcoming most of the difficulties they faced, the primary reason behind the continuing decline in the local financial markets, that is in the UAE, is mainly structural. And that does not clearly reflect the performance of listed UAE companies, some of which enjoy high growth and good financial status.

Trading process

Among structure-related factors is the issue of the local market being strongly associated with the stock prices in the real estate sector, which leads the trading process.

This is a rare case, especially when it is not possible to link the performance of other sectors, specifically service-providing companies, directly with the rise and drop in the shares of real estate companies, which are still suffering from the repercussions of the crisis.

This has left an impact on the performance of banks due to huge loans given to the real estate sector. This required banks to make large allocations to provisions for impairments in 2010.

At the same time, local markets suffer from a lack of productive companies, and particularly industrial companies. This makes the local market highly vulnerable to the real estate and service sector that is suffering from high fluctuations due to fluctuations in the global economy that require some time to stabilise.

Nevertheless, there are many positive initiatives that will possibly lead to the recovery of the Emirates Securities Market in the current year. At the forefront of such initiatives is the approach that aims to merge both markets into a single market, which will reduce the negative affects suffered by the real estate sector's stocks.

Moreover, it will also lead to the possible inclusion of new companies in the market, including some industrial companies which will be established or those that will offer a portion of their stocks in an initial public offering.

In addition, the banking sector's allocations for bad debts will be much less than in 2010, which will lead to an improvement in the bank's performances and increase their profits in the current year. This means that Emirates Securities Market will be able to overcome many of the obstacles it encountered last year. Some good stocks that were treated unjustly by the market and investors are expected to recover, especially after their prices plummeted below their nominal rates despite their profitable distributions and good performance.

Other Gulf bourses will boost their assets in 2011 and achieve even more growth. This is further supported by many factors, some of which are expectations that the GCC economy will grow, oil prices remaining at high levels, and the quick recovery of the global economy which began with the recovery of global stocks.

Therefore, investment opportunities that are available in the Gulf financial markets are considered favourable. However, this will depend on many supporting factors, especially those related to the entry of institutional investments into the markets, which were quite reluctant to do so earlier. It also requires improving the transparency of Gulf stocks, which still suffer in this area. This approach can be supported by developing legislations and regulations that will govern the operations of financial markets in a transparent and modern way.

 

The columnist is a UAE economic expert.