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Fathoming the unfathomable

IT is perhaps appropriate to refer to the recent decline in the GCC stock markets as a crash. In the last seven months the Dubai Financial Market has lost around 60 per cent from its October peak. In fact there is a risk of a contagion spreading across the GCC bourses as investors become increasingly jittery particularly at the retail level. Any sustained investor nervousness has the potential to spill over into the real estate sector as investors systematically reduce their positions.

To what extent the GCC wide sell-off is being exacerbated by investor inexperience or perhaps more worryingly by the unravelling of highly leveraged transactions remains unclear. However, last week the Financial Times added to concerns that some banks primarily in Saudi Arabia were under pressure following the decline in equity prices. Similarly the UAE Central Bank’s memorandum to banks and financial institutions to specify the extent of their exposure indicates an awareness of the potential risk and necessity to carefully regulate an area that may have been susceptible to abuse in the past.

Although valuations are now reaching more realistic levels it is likely that the markets have further to go on the downside before they are able to generate any traction. Having broken support at a number of key levels it is possible the DFM could puncture the 400 level in the near term. The market is currently oversold which may result in a short-term rally but is yet to demonstrate any sign of a technical bottom that seasoned analysts will be looking for. It is however clear that geopolitical risk is weighing heavily on the markets and any early resolution to the situation in Iran could provide the positive impetus the markets are looking for.

With talk of intervention in the markets it is likely they will be the subject of intense scrutiny for some time to come for any sign of direction — either way.