Lessons from the Gulf Stock Markets' Crisis

  • 21 March 2006

Gulf Stock markets have not yet recovered from the crisis that rocked them in the past weeks. Some observers view it as a moderate correction that might last throughout the first half of this year, following the two years of steady increase. Yet, several lessons need to be learnt from the crisis. The direct interference of Gulf authorities to bail out stock markets, underscores the fact that these markets are still immature and underdeveloped. They depend on strong government intervention to save them from their first real test, although such intervention will have adverse repercussions, which will be noticeable later.

One of the major lessons learnt from this crisis is that it has affected only those who underestimated the reaction of the markets that were approaching a period of correction. Signs of the onset of this phase were clearly noticeable from the first week of this year after the phenomenal rise in prices to frightening levels that defied economic rationale. Those who could sense the risks sailed through the crisis by employing a cautious approach in their investments. Gulf stock markets mainly depend on individual investments, even though institutional investment generally contributes to market stability. Most of these investment projects are long-term and are relatively massive in scale. They are based on practical and precise calculations.

This crisis has largely revealed a lack of awareness among several stock market dealers. It has also disclosed the predominance of speculation over real investment. Some dealers were lured by the handsome rise in profits and got engaged in operations that make for quick gains. Others relied on rumors and their personal judgment in their transactions in a marketplace where most dealers lack investment awareness. There is less transparency and clarity in the markets. There are plenty of internal dealings and a tendency to withhold information. As a result, small investors have been compelled to give up their faculty of critical analysis and have started following the behavior of major investor's in the market. The Gulf media describes this attitude as "herd mentality"—a risky approach that may produce a "snowballing" effect. If destined to emerge in the Gulf stock markets, such tendencies would destroy the markets, as they would be bereft of investment opportunities. These markets focus on the shares of certain companies to the exclusion of others. The circulation of only 10% of the shares owned by certain companies enlisted in the Gulf stock markets represents more than half of the gross circulation in these markets.