Correction of regional bourses will continue

Dubai: The recent correction of the regional stock markets will continue before a solid base is formed, according to Dr Henry Azzam, chairman of Dubai International Financial Exchange (DIFX), who said the drop in some bourses was "well justified" in response to the extended valuations.

While the correction in the region's stock markets brought share valuations to less overvalued levels, he predicted the value of 150 IPOs by 2008 to be more than $35 billion.

Dr Azzam, speaking at the IPO and Asset Management Middle East conference yesterday, said the market correction had been "exacerbated by panic among the retail investors".

"Investors lack the 'blind' confidence which fuelled the market momentum between 2002 and 2005. The correction follows a decline in corporate profits, as well as reduced yields and rising interest prices," he said.

Similarly, he predicted that regional real estate prices will peak soon and may then start a downward correction as well.

Dr Azzam pointed to "a high degree of contagion" across the markets, with panic sales across the regional (Mena) markets.

He said while trading volumes will decline, primary market activity will not be affected a great deal.

"In 2006, investors will experience the reverse of the "wealth effect". People will feel that their wealth has shrunk and this will discourage them from spending. This will reduce consumption and weaken overall economic activities in the process."

He said the boom will again build momentum throughout 2006, with government budgets tipped to grow by 20 30 per cent, while investor attention moves from stocks to productive companies.

Positive factors continue to be oil prices in excess of $50 a barrel, strong economic growth in the region, ample excess liquidity, more inward-looking investments and the development of securities laws and capital markets promoting more transparency and fair dealing.

But he also urged caution, citing higher interest rates, declining corporate profits in the first quarter this compared to the previous corresponding period, continued overvaluation in several markets, and a strain on liquidity through IPOs and capital raising.

The issue of government intervention, which Dr Azzam said could encourage a lengthening of the correction period, also came under debate during the conference's panel discussion on developing regulatory environments to ensure sustainability in the region's markets.

Suresh Kumar, Chief Executive of Emirates Financial Services, said, "The greed of 2005 gave way to fear in 2006, and the machismo of citing massive oversubscriptions which was mainly through bank leverage led to a suspension of belief. But there is no need for regulators to micro-manage the market, while the best time to introduce reform is in times of success, not in times of decline."

"The international best practice frameworks must now flow through to older regulatory regimes," Kumar added.