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Falls could mark end to share boom

A leading investment bank has warned that Saudi Arabia’s Tadawul stock market must study recent drops in the UAE and Qatari exchanges, if it is to avoid falling foul of investors’ “irrational exuberance”, and itself suffer a dramatic correction.

A leading investment bank has warned that Saudi Arabia’s Tadawul stock market must study recent drops in the UAE and Qatari exchanges, if it is to avoid falling foul of investors’ “irrational exuberance”, and itself suffer a dramatic correction.

In a new research report, The Winter of Discontent, Tarek Fadlallah of Nomura investment bank points to market corrections in the Dubai Financial Market (-24%), the Doha Stock Market (-23%) and Abu Dhabi (-13%), and argues that the fluctuation in market performance “may have signalled the onset of a new phase in the evolution of the GCC markets.”

He fears that the Saudi market — where market capitalisation exceeds US$700 billion, and which has enjoyed indexed price level appreciation of 774% over the last 39 months — has defied the odds thus far, but could soon see a correction of a similar scale.

In the first week of March alone, the Tadawul Index declined 10.37%, losing 2,138.60 points in a week. “The UAE market consolidation is ongoing, as we can see, but the correction in the Saudi market has been delayed due to relative inefficiencies in the discounting mechanism of that market compared to the UAE,” Fadlallah told Arabian Business.

“Basically, the bull market may still be intact, but the unbounded enthusiasm of the markets of last year is clearly over, and we are just in a new phase now. It’s going to affect all the markets. Its not necessarily bearish, it just means that you are not going to double your money every six months,” he added.

“The higher they go, the further they fall, potentially,” cautioned Fadlallah.

Some observers believe a market correction in the Saudi market could trigger a crisis as investors that borrowed money to invest start receiving margin calls. Fadlallah feels that this is a matter of some concern for the kingdom, and points to anecdotal evidence in the regional news.

“You can see… reports that people are suffering just because the Saudi market has come down 10%. Ordinarily, if you are a cash investor and you lose 10% then that’s not a huge deal. But if you are leveraged two, three or four times then that of course amplifies your losses. [That risk] might amplify your gains, but when it goes the other way, then of course it’s much more serious,” he said.

Last week, the Saudi daily Al Madinah reported a Saudi father had lost more than half of his daughter’s dowry money in less than two days on the stock market. Instead of doubling his money, the father lost more than half of the US$13,000 dowry, and was forced to sell one of his cars to cover the loss.

He believes that stock valuations in the UAE have gained slightly more credibility recently, due to an improvement in qualitative research and an inclination on behalf of firms to disclose more information.

“We are starting to see a relatively soft landing in the UAE in terms of the stock market. I know that some people have unfortunately lost a lot of money, but it perhaps could have been more of a bloodbath than it seems to have been at this point,” said Fadlallah.

He added: “The professionalism in the investment community and also in the media is maybe helping the process. The authorities are now becoming very professional, and in the longer term the economy looks good. It’s really just a question of a few more loose ends in the UAE markets being tied — [for example] greater transparency and clarification of accounting standards [would allow investors] to really start to judge whether these companies are worth what they say they are worth. It's not a bleak picture.”

Fadlallah said that the biggest lesson to learn from the current market volatility is for investors not to over-commit themselves. “By all means feel free to invest sensibly and be confident about the outlook for the local economies, but don’t over-commit and over-stretch your finances. Take a diversified approach and be there for the long term. The problem is that when you start looking at screens minute to minute, as a lot of people are, that tells you that it’s gone from investment into the realms of speculation. That’s potentially dangerous.”

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