Investors in the Middle East stock markets have had a tough few years. A crash in regional equity markets in 2006 was swiftly followed by another in 2009 as global markets plummeted. The New Year promises a new dawn for regional markets.

That would be welcome relief for regional investors. Many of them had been borrowing to play the market, and after two successive collapses in equity values, are now massively in the red.

International investors have been burned too. They thought the Gulf was a strong region with well-capitalised government sponsors behind most companies. The global recession was expected to largely pass by the region. Instead, debt problems emerged in various spots, the economy slowed, and spooked international investors put their money in other emerging markets. All that made 2010 a torrid year for regional equities.

The economic recovery and a strong oil price, predicted to hit $100 a barrel again soon, have restored confidence. But the changing circumstances will not be enough to bring longer term health to the equity markets.

Governments and regulators need to be more proactive. Regulators need to ensure that banks have cleaned up their loan books to give private companies access to credit. Foreign participation limits need to be lifted, or removed in the case of Saudi Arabia. Finally, steps need to be taken to boost transparency.

One further factor that should mature the markets is that local retail investors have realised that professional funds may be able to better manage their investments. That should help reduce volatility.

Unless those steps are taken, the optimism of 2011 may prove to be a false dawn.