Panic exposes fragility of Gulf markets

Sliding oil prices, leverage and sheer panic have exposed the fragility of Gulf equity markets just as they are becoming mainstream destinations for international investors.

In May, MSCI upgraded Qatar and the United Arab Emirates to emerging-market status, drawing billions of dollars of new money to them. Saudi Arabia will open its bourse to direct foreign investment next year, which could draw tens of billions of dollars in coming years.

But a plunge in the markets over recent weeks has wiped out roughly $150 billion of value since the end of October in the six wealthy oil-exporting nations of the Gulf Cooperation Council, underlining the risks in the region.

The trigger was the collapsing price of oil, which provides Gulf governments with the bulk of their revenues. Some investors fear state spending will now be cut, undermining corporate profits.

But the problems go beyond oil. Some investors, particularly in Dubai, used heavy leverage, including bank loans, to buy stocks on the way up; they are now selling the stocks to cover the debt. The UAE central bank is studying how to limit stock buying with bank loans in future.

Another issue is the dominance of retail investors. They account for over 90 percent of daily volume in Saudi Arabia, far more than the ratio in major markets elsewhere. Many focus on the short term rather than basing their decisions on long-term value, as institutional investors do. That can magnify moves.

The result has been to cripple the markets. Saudi Arabia’s market, the biggest in the region, has sunk 25 percent from its peak in September. Dubai is down 31 percent.

Although the declines have left many stocks competitively priced by global standards, few people are willing to call a bottom for the markets just yet.

“Values are not the problem. The problem is that negative momentum has started – some clients are panicked,” said Mohammed Ali Yasin, managing director of NBAD Securities, a top Abu Dhabi brokerage.

“What we need now is something to stabilise the markets until the panic selling is over. Until that happens, we may test new lows.”

In contrast to Gulf markets’ crash during the global financial crisis in 2008, the current slide appears to be causing little stress in the rest of the financial system.

That is because real estate markets in Dubai and elsewhere look much healthier. In addition, Gulf regulators have strengthened banks since the crisis.

So the stock market debacle has not pushed up credit default swaps prices or bond yields in the big Gulf economies. Currency spot markets show signs of money flowing out and forwards have moved, but not enough to suggest pressure on the countries’ currency pegs to the dollar.

Except for Bahrain and Oman, where state finances are relatively weak, investors are probably wrong if they fear cheap oil will slash government spending – even if Brent crude stays near $60 a barrel.

At that level, most Gulf governments would run budget deficits next year, but their huge fiscal reserves would let them keep spending heavily for many years.

Yasin said profits could still grow 10 to 15 percent next year at many UAE banks, down slightly from this year but enough to make UAE markets attractive, given their lowered valuations.

On the trading floor of Dubai’s biggest exchange last week, many retail investors agreed. They blamed Dubai’s weakness on temporary factors: leveraged positions being cut, the suddenness of oil’s drop, and initial public offers that drained funds from the market.

“It will rebound. All the companies are making money,” said a local investor who identified himself as Mohammed.

But he and others were not sure what will halt the slide. Some look to Saudi Arabia’s disclosing its 2015 budget around the end of December — a big budget would comfort investors.

Another inflection point could come in January, when funds open their books for the new year, or in February, when many Gulf companies announce fourth-quarter earnings and the effect of lower oil prices will become clearer.

Hopes that Gulf authorities will intervene are probably misplaced — they did not do so effectively in 2008. Kuwait has in the past used a state fund to support blue chips, but its market has been the GCC’s worst-performing this year.

“Tomorrow may be a tough day – people are talking of oil reaching $50 before it hits bottom,” Yasin said.