The combined stock markets of the six Gulf Cooperation Countries are worth around $690 billion, about the same size as Hong Kong.
But the oil and gas reserves of the GCC are worth $30 trillion at current prices, not far short of the market capitalization of all the stock markets of the world. This is a considerable mismatch between paper and hard assets, and ought one day to be important.
Poor immediate prospects
However, the immediate outlook for Gulf equities is not good, according to Nomura whose distinguished local forecasting record includes spotting and warning about the bubble in Arabian equities in 2005 which nobody else did, apart from Marc Faber.
Executive director Tarek Fadlallah went immediately for the jugular in his presentation to a conference at the Dubai International Financial Centre this morning, and pointed out that 70 per cent of corporate profit growth in the recent boom came from credit-related sectors where business prospects are now lousy.
All the same, with oil prices relatively strong he saw a moderate recovery in corporate earnings. But credit conditions remain challenging, local investors have been bruised and foreign investors scared by the Dubai debt crisis.
His view is that GCC stock markets will remain range bound over the next 12 months. They have not bounced back to the same degree as other emerging markets, but then Mr. Fadlallah was even less confident about the immediate outlook for those markets.
Aside from the real estate crash and its trail of bad debts, he worried about the impact of growing competition on traditionally high Gulf profit margins, and a failure to make progress in improving middle management, transparency in corporate governance and market reforms.
Nasdaq parallel
By way of an historical parallel Nomura offers the Nasdaq crash in 2000 and subsequent market performance compared with the post 2005 performance of Gulf stock markets.
The Nasdaq crash can be seen as like an emerging market cycle. But it is arguable that the Gulf stock markets could be close to a bottom, or at least base building for their next manic phase, doubtless when oil prices next take off.
The 1998 Gulf stock market crash was every bit as dramatic as 2005, and what goes around will come around again. If it is another seven year cycle then sat here in 2010 that might not be so far off, 2012 in fact.
So at some point in the not too distant future there will be a great time to buy Gulf stocks. They are real asset backed to a unique degree, and as inflation picks up in the forthcoming global recovery that is likely to be a great strength.END
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