Recently, many questions have been raised about the state of the Gulf’s stock markets. In the fourth quarter of each year, they typically witness gains as investors engage in heavy trading in anticipation of year-end profits, whether through speculations or from cash dividends paid out by the listed companies.
The proceeds have been quite meaningful for long-term investors in the last decade. This year, the situation is quite different, and a state of uncertainty has taken hold, as investors are unable to recognise future prospects. This is true of all stock markets and not just the ones in the Gulf.
More than ever before, the Gulf financial markets have become more open to outside influences. This has been backed by internal dynamics as well as external factors, including geopolitical ones. The Gulf economies are still strongly linked to oil prices, which have been experiencing vicissitudes of its own as evidenced by the drop from $85 a barrel to $50 in less than two months.
As the stock market is a reflection of the rest of the economy, the impact has been felt by other sectors, including real estate, which is going through setbacks not only in the Gulf. In turn, the stocks affected include those of leading regional real estate companies.
Prices of other sector shares too have nosedived, particularly as they are strongly associated with the fortunes of real estate, including those of banks and construction companies.
Liquidity has dropped significantly in the share trading, affected by exits of some financial institutions for their own interests and the decline in the presence of smaller investors due to pressing cash obligations elsewhere. There have also been intense speculation on some shares.
These have reduced the appetite of investors and has highlighted the need for more regulations to further develop the legal structure of Gulf stock exchanges. The geopolitical factors have had a role in influencing investors, especially foreign buyers who represent an important part of the total market unlike a decade ago when there were many restrictions on them.
The crises in the region are numerous and complex, placing individual and foreign financial institutions in the grey zone. The foreign media too has played a negative role in presenting an exaggerated picture of the situation.
Moreover, reports for the International Monetary Fund (IMF) published last week suggest that a deep global crisis is in the offing due to several factors, including the size of global debt and the fallout from trade skirmishes. These have had a grave impact on stock markets everywhere.
This is happening at a time when the Gulf’s economic conditions are turning stable and listed companies are making big profits. The economies are achieving good growth rates, and most of their stock exchanges have joined the MSCI Emerging Markets index. Saudi Arabia and Kuwait were the most recent entrants, and will result in future positives.
There is a discrepancy between the reality of economic conditions and the performance of Gulf stock exchanges. Although, such factors can negatively affect the performance of financial markets, the consequences will not be at the current exaggerated levels. It means that overcoming this bottleneck will provide good investment opportunities and rejuvenate financial markets.
Until then, there is no issue of concern to investors other than more uncertainty.
Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.