Bitter medicine

26 May 2006
More than 1,000 investors packed a private forum in Jeddah on 19 May to vent their frustration at the three-month collapse of share prices in the kingdom. The government, the regulator, the banks, the big market players all were targets of intense anger. Saudi investors are not alone in the GCC in seeking someone to blame for the precipitous and contagious slump that has infected the region's bourses since the start of the year.

Saudi and UAE investors have been hardest hit. The Tadawul All-Share Index (TASI), Dubai Stock Market (DSM) and Abu Dhabi Securities Market (ADSM) indexes are all down by more than a third since the beginning of 2006. The Doha Securities Market and Kuwait Stock Exchange have each seen year-to-date losses in the region of 20 per cent. And the Bahrain Stock Exchange is down by about 10 per cent a sharp drop given the bourse's general torpor. Only the Muscat Securities Market remains in positive territory just.

Retail investors' eagerness to find a scapegoat is understandable. Lured into the unfamiliar world of share trading during a time when it appeared that the price path went only one way, the reality has been sudden and harsh. Some analysts have little sympathy, simply blaming greed. But both governments and regulators are widely criticised for their failure to provide sufficient education, particularly as the authorities themselves have encouraged the shareholding culture through the sale of stakes in government-owned or affiliated companies the likes of Emirates Foodstuff & Mineral Water Company (Agthia) in the UAE and Yanbu National Petrochemical Company (YanSab) in Saudi Arabia.

A reporter touring some of Jeddah's luxury malls in mid-May noted the increased proportion of window-shoppers. A straw poll of those trawling the Louis Vuitton shop unearthed only one customer considering purchasing a handbag. The luxury goods market is one of the few sectors of the real economy certain to be affected by the stock market slump. But the social impact will be far greater than a decline in sartorial elegance. More sobering stories abound of marriages broken and livelihoods lost among ruined investors, many of whom had given up day jobs to play the lottery full-time.

Ultimately, analysts agree the reason for the slump is patently obvious. Share prices had become enormously overvalued in the Saudi, UAE and Qatari markets. Economic buoyancy, a feel-good factor and masses of liquidity weighing down on too few stocks had pushed up price/earnings (PE) ratios to excessive levels and a correction was long overdue. And the more prices continued climbing regardless, the further they had to fall.

The gap between investor decisions and market realities proved the key to the speed of the decline. Irrational exuberance' was the favoured epithet. 'This market kicked out fundamentals a long time ago,' says Khan Zahid, chief economist and vice-president at Riyad Bank. As soon as the rot set in prompted regionally by disappointing profits from Dubai-based Emaar Properties confidence plummeted across the major markets. When the Saudi market started haemorrhaging, the ripples were felt across the Gulf and beyond. Bits and pieces of concrete earnings news only hastened or momentarily stemmed the

downward tide.

The chairman of Saudi Arabia's Capital Market Authority (CMA), Jammaz

al-Suhaimi, paid with the loss of his job on 13 May, removed by royal decree and replaced by Abdulrahman al-Tuwaijri (MEED 19:5:06, Cover Story). The response was mixed. Some analysts considered Al-Suhaimi unfairly targeted, others viewed the sacking as justified considering the CMA's response to the slump, which was widely seen as misguided and inadequate. Well-intentioned measures had the opposite of their intended impact: their imposition led traders to believe there was good reason to be worried.

'The 11 March crash was a s

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