GCC markets show an apparent overvaluation in comparison to their peers in other emerging markets such as Asia and Eastern Europe. While their price/earnings ratios are up to three times higher, the price/book ratios are as much as six times greater. They are thus exposed to severe risks after years of relentless appreciation, according to “GCC Stock Markets at Risk,” a study by the Gulf Research Center (GRC). “From a short-term trader’s point of view, one can buy now, because markets are oversold. But some months from now, the current corrections might just be seen as the beginning of an all-too-logical adjustment process. In any case, investors should stay away from credit-financed speculation,” recommends GRC Program Manager (Economics) Dr. Eckart Woertz, who has written the study.
Other highlighted predictions are:
• Oil prices will remain at current, elevated levels, and oil revenues will provide continuous liquidity to the region. Reasons for this include growing US dollar money supply, increasing demand in emerging markets (China, India, and the GCC), and declining production in many regions (including the US and the North Sea). The relative importance of Middle Eastern oil will increase.
• The GCC countries will continue to accumulate current account surpluses and show profiles different from those of Mexico and Asia on the eve of their financial crises in 1994 and 1997-98 respectively.
• The high valuations of stocks and the speculative hype surrounding the stock markets (with turnover, IPOs, and volatility at record levels) pose dangers for the GCC. The expansion and quality of credit are both worrying.
• The striking overrepresentation of firms in some sectors (financial, telecom, petrochemicals, and real estate), the prevalence of big companies (e.g. SABIC), and small free floats could cause problems too. The total absence of a technology sector is not desirable.
• Attempts to regulate margin buying, IPOs, and insider trading need to be intensified. Quality family enterprises should be encouraged to go public. The development of a domestic bond market could also open much-needed alternative investment venues, especially if there are further increases in US interest rates. The establishment of a derivatives market and opportunities to sell short could also sober up markets.
Overall, the study concludes that the challenge for the authorities and regulatory bodies will be to curb liquidity and channel it into viable long-term development and the further diversification of the GCC economies.