Thursday, May 11, 2006

UAE Stock Market (con't)

When I posted about the 'marital difficulties' caused by the fall in the markets, one commentator asked my opinion about where the market is heading.

In May, 2003, the Dubai Financial Market was at approximately 118; in May, 2004, it was at approximately 200, a gain of about 70%; in May, 2005, it was at about 1,000, an annual gain of about 400%.

The consensus was that 9/11 made the West unattractive to Middle Eastern investors, and that the $60 a barrel oil money had to go somewhere.

In Dubai, it was more than just Middle East money: Dubai let anyone who could come to Dubai open an account at the DFM. So there was the prospect of limitless amounts of Western money chasing the Middle Eastern money.

Personally, I was going to put my money in the market last Fall (before the weather had cooled below 40), only I waited an hour for a public transport (which didn't come) and I decided it was too hot, that I'd wait until things cooled down a bit.

Meanwhile, quite a few people went to the bank, borrowed all they could, and put the lot into the market. Not just in Dubai, of course, but in all the Middle Eastern bourses.

The DFM continued up to over 1,300 in August, 2005, but has since fallen to 465, which is still more than double (233%) what it was in 2004. Or about 36% as much as it was worth at the peak.

The Middle East cannot really be compared with Wall Street in 1929. At the time, the US had the world's largest domestic economy, and everyone knew that, with the complete ban on alcohol, productivity would continue to soar far beyond the rest of the world, and the US economy could only keep growing. The US, unlike most of the world's bourses, allowed almost anyone to invest in its stock markets, not just citizens. So it was a "no-brainer" to invest in the US market.

Then the US banned all foreign trade, the entire world economy collapsed, and US stocks fell by 89%, declining fairly rapidly at first, but then going down fairly steadily until 1932. It took 25 years (and a World War) for the US economy (and stock market) to recover back to 1929 levels.

But this is the Gulf.

And, as one poor interviewee told the Gulf News, "For me the loss is doubling, as I cannot focus anymore on my work," he said. "I cannot attend to my wife and children - how can anyone be able to, while facing bankruptcy and maybe imprisonment threats?"

If the workers here can't work, what does that say about the economy and its prospects?

But the Middle East markets are tiny, and most shares are restricted, so they can't be traded. Except for Dubai, it is difficult for most people to invest in the markets (cf. The Religious Policeman's comments on the obstacles that prevent non-Saudi's from investing in the Saudi stock markets).

Forecasting based strictly on 2003 and 2004, a 'fair value' for the DFM would be somewhere between 400 and 500. Market dynamics during a crash of a free stock market usually go well below 'fair value,' leading to buying opportunities. (People who bought the US in 1932 did very well, but not those who bought right after the crash in 1929. Or 1930 or 1931.)

But this market is so tiny that it could be propelled back upwards by inserting a single day's oil revenue. Or allowed to fall back below 200. And I can't see any easy way to predict which way the wind is going to blow.


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