Gulf investors, markets needlessly get caught in another 'Black Monday'

The global financial markets, including GCC stock markets, experienced a severe jolt on Monday (August 5) in what immediately was dubbed as another ‘Black Monday’.

In the past, there have been similar Black Mondays, such as the one on October 19, 1987, when the Dow Jones index plummeted 22.6 per cent. And then during 2008 global financial crisis triggered by the US mortgage crisis. The most recent, which occurred on another Monday - March 16, 2020 - was less intense.

Numerous analyses were issued explaining the nature of last week’s crash, which was quick and temporary. The key concern for us is its impact on the GCC stock markets, which reacted in tandem with US and European markets, as is the case with most global markets.

Instant panic

The pressing question is: did this require all this panic in the Gulf stock exchanges? The panic led to a massive wave of selling and consequently leading some of the region’s financial markets to fall by over 4 per cent, surpassing the drop in some Western markets.

If we examine the causes of the crash, we find that it is mainly linked to the state of the US economy after certain indicators such as the possibility of a recession and the bursting of the bubble of technology companies showed up. There was also the downbeat unemployment rate, since stock markets are seen as a mirror of the economy.

However, there is no direct connection between these reasons and the GCC economies that continue to achieve good growth rates, enjoy moderate inflation and unemployment rates. This, hence, does not justify the panic that gripped investors, particularly retail investors with small market exposures, who followed the herd without fully understanding the strong fundamentals of the GCC financial markets and the inherent strength of these economies.

Investors’ heard-like mentality

It is true that the global economy has become interconnected and intertwined in an unprecedented way, and that any impact in a particular region will leave effects on the rest, particularly if it involves the US economy, the world’s largest with a dominant currency and leadership in advanced technology. However, the reaction must be within its natural limits and not exceed the impact felt in the crisis’s epicentre, where the Dow Jones dropped 2.6 per cent.

This overreaction can be attributed to several factors, chief among them being the weak investment culture in the region, which causes many investors to react impulsively to fears and speculations, often resulting in serious losses.

These volatile conditions create ideal opportunities for speculators, who have a deep understanding of financial market fundamentals to secure substantial gains. This was evident in the strong rebound of GCC stock exchanges the following day, where nearly all listed stocks saw significant rises.

Despite the fact that GCC capital markets have faced similar situations in the past, they have unfortunately not fully capitalised on those experiences. The current scenario underscores the importance of exercising caution and relying on sound analysis before making any investment decisions, particularly in the capital markets. This approach is crucial to avoid losses and secure rewarding returns.

Notably, the annual dividends by companies listed in the GCC capital markets rank among the best in the world. With more challenges on the horizon, including the potential for more than seismic Black Mondays, it's crucial to learn from experience and work to mitigate risks. Diversifying investments, no matter how small, and building a varied investment portfolio — whether at the individual or institutional level—are essential for successful outcomes.