The dive in Arab stocks may be alarming, but the boom following the rise of oil prices was sure to lead to a boost, writes Ibrahim Nafie Over the past two weeks, stock markets from the Gulf to Jordan and Egypt experienced a sharp downturn. In the ensuing panic, small investors in Jordan and Kuwait took to the streets, asking the state to intervene and blaming major and institutional investors for the downturn. As a matter of fact, the downturn was to be expected. A few months ago, I mentioned that the massive liquidity surplus caused by rising oil prices has inflated Arab, and especially Gulf, stock markets. It's all supply and demand. When a large amount of cash competes for a limited amount of stocks, the prices go up. Small investors make it worse. They rush into the action, armed with little knowledge, and get burned. Small investors often have no means of assessing the future prospects of any company. Therefore, they have no realistic assessment of stock value. For four years now, Gulf stock markets have been heading up. Exactly a year ago, the Saudi and Kuwaiti stock markets experienced record one-day gains. At some point, a correction was due. Stock prices had to go back to a level commensurate with profitability, which is exactly what happened. The Saudi stock market lost 10 per cent and the Kuwaiti lost 6.7 per cent in the last two weeks alone. In Qatar, Bahrain, the Emirates, and Oman, the trend was similar. A domino effect was inevitable, for when Saudi investors pull out of the Kuwaiti market, the downturn in the latter gets worse. As for the future, it is my opinion that the markets are likely to bounce back, for economic indices are robust in most Gulf states, and oil prices are unlikely to drop anytime soon. The Egyptian stock market was no exception to the rule. CASE 30 shed nearly 19 per cent of its value since the record high it hit in early February. Almost certainly, small investors suffered painful losses. Having little or no knowledge of where the real market value was, small investors first bought excessively then sold excessively, accentuating the fluctuation. Despite the drop, the market is still 46 per cent higher than it was last year. As you may know, the Egyptian market ranked second worldwide in growth in 2004 and first in 2005, with a rise of 146 per cent. The losses in Gulf markets depressed the Egyptian market. Foreign dealings in the Egyptian stock market dropped to below LE300 million a day recently, down from an average of LE500 million. This is another example of the domino effect. Once the markets started crashing, Arab investors liquidated their assets in Egypt. Whether they did so to cut their losses or because stocks at home looked cheaper, their actions had the effect of driving the Egyptian market down. Small investors are now asking governments to protect them from big speculators. There are limits, however, to what governments can do. Government can regulate the market and help disseminate information. Governments should sponsor a culture of prudent investment. And they need to provide transparency and monitor dealers. This is crucial, for dealers have a propensity to fill in the requests of major investors before those of small investors. That puts the latter in an unfairly vulnerable position. Unless the dealers respond to all investors promptly, regardless of the size of their holdings, small investors may find themselves at a serious disadvantage.
