Bahrain’s stock exchange has fallen by 16 per cent since the beginning of the year as the country’s fractious political situation continues to weigh on investor sentiment.

Elections were held on 24 September in an attempt to move beyond the unrest that brought the country to a standstill earlier this year and the results show no signs of progress. Reform is unlikely to come anytime soon with nine seats still left to fill after 18 parliamentary seats were left vacant by delegates of the Shia Al-Wifaq party.

The lack of Shia representation, a key factor that fuelled the protests in February and March is still an issue.

Out of the GCC countries, Bahrain is now the least politically stable. Investors are unlikely to return to Bahrain, while it is still associated with political risk. The country seems to have lost most of its competitive edge to Dubai.

“It is hard to see what the country can do to draw business back in the short term, given that political issues are not perceived to have been resolved,” says Liz Martins, senior economist at HSBC.

The foreign aid promised to kick-start its economy has not yet reached the country and the benchmark Bahrain Bourse declined almost 2 per cent as results of the impact of the unrest were revealed.

According the UK’s HSBC, economic growth fell to 1.8 per cent in the first quarter and went down to just 0.8 per cent in the second quarter, substantially lower than the 4.5 per cent overall gross domestic product (GDP) growth of 2010.

The Bahrain Bourse lost almost 4 per cent in this third quarter to date.  

The stock market has not really recovered from the global financial crisis and the 2008 crash. Volumes are still very low and there is little interest in the small market.

“Trading activity on the BB remained subdued, with an average daily volume and value traded of 1.7 million shares and $0.55m respectively in the third quarter this year, lower than the previous quarter,” says Jithesh Gopi, head of research at Bahrain-based Securities & Investment Company (Sico).

With the European debt crisis becoming increasingly strained, the contagion effect is likely to ripple through to the GCC countries, providing further strain on the bourse.

“There is more unpleasantness to come, global slowdown is happening and that will feed through to this part of the world,” says Martins.

Investor sentiment is unlikely to be restored to levels before the unrest, which will further impact volumes. The picture seems bleak for the Bahrain Bourse and weakness in stocks have added to this sentiment.

According to Gopi the financial, commercial and tourism sectors are expected to improve by the end of the third quarter when compared to the first half of the year.

“Tourism arrivals, which drive Bahrain’s service industry picked up sharply during July to September, which we believe will contribute to GDP and corporate profit growth in the coming quarters,” says Gopi.

The government’s approval of $862m extra budget spending and the cabinet’s approved draft law to raise the borrowing ceiling from $6.6bn to $9.3bn should help to boost economic activity. But for the time being, the Bahrain Bourse’s only attraction is to long-term investors looking to buy into the likes of Batelco, Seef Properties and BBK, which are trading at historically low levels.