UAE Index (hat tip: collounsbury)
Yesterday EconPundit Steve Antler noted that
- Middle Eastern countries have stock markets.
- They’re crashing.
- Investors in those countries aren’t happy about it.
(Steve’s post includes many links)
So, what’s going on? For insight I turned, of course, to John Chilton, the Emirates Economist, who, sure enough, had a post on that very subject. John suggests a couple of reasons for the tumble:
- Recent events on the world stage that call the value of of ME companies into question.
- An institutional environment that encourages excessive risk.
Lo and behold, I turn to Glenn Reynolds this morning and what to my wondering eye does appear but a post noting the rise in the U. S. stock market. Glenn also asks, reasonably, why the rise is unremarked upon. He might well have wondered why the decline in ME bourses went similarly unnoticed.
May I venture that these things may be related? As the U. S. market rises, foreign investors may be more inclined to sell their local investments and invest in U. S. companies. Or, as local markets decline the U. S. may look like a safe harbor.
I don’t see this as an unalloyed blessing but whatever.
The blogosphere is a wonderful place. There’s an old rabbinic saying: “The wise man know everything; the shrewd man knows everybody.†Nowhere is that more true than the blogosphere.
UPDATE: collounsbury notes that it’s the Gulf markets that are crashing rather than Arab bourses generally.
I don’t know where to start.
First, it’s the Gulf markets that are crashing – Gulf is not a synonym for the entire Arab world. Other MENA region markets have declined, but hardly crashed. That’s more of a correction for Econopundit.
Second, again for Econo pundit, the demos occured in one country – Kuwait – wouldn’t it behoove us in the 21st century to start to distinguish between the WOGS?
Third, I doubt the US market tick had anything to do with this.
The Emirati Economist had a nice post though.
Thanks for the clarification, collounsbury. It’s my nature to search for connections between events. Sometimes they’re there, sometimes they’re not. I think I’ll put a correction in the original post, though.
I do think that the market turndown in the Gulf markets is important and that was the real motivation for my post.
It is important in terms of the Gulf, there are a lot of things bound up in this:
(i) the emerging acceptance of free market economics
(ii) the confidence in investors in the new market institutions and regulators
(iii) the ability of the new liberalising reforms throughout the region to show something for the little guys.
In that context the Gulf markets with all their hype are very important symbolically.
The Gulfies have also not done a good job of putting up institutions.
If this little bubble breaking is not well managed, it really could turn into something ugly. Ugly in terms of local politics and ugly in terms of the success of ongoing market liberalisation.
To me, that is very, very important.
BTW easy if somewhat granular charting is found here http://www.ameinfo.com/financial_markets/UAE/
You’ll see the Gulf bourses have plunged.
They don’t include there the Maghrebine bourses, which as of today are actually up around 2-3 percent.
Those are really fascinating charts, collounsbury. Thank you. They certainly look like bubbles and they certainly look like corrections. Got an interpretation of what’s behind it? Except for the Palestine Index they seem to have taken off around 3/2003.
Just look at that chart. When markets go parabolic like that, and it doesn’t matter what market it happens to be a chart of, they tend to crash because a rise like that is not sustainable. It’s just lunacy. It has nothing to do with what’s going on in our market. It’ll probably get a lot worse if I had to guess. Just for fun I’ll take a wild ass guess and say that before it’s over that market in the UAE will have lost about 85% of it’s value from where it peaked at about 6750.
I wonder if they’re starting to get nervous about the folks on the north side of the Gulf, and maybe moving some investments into gold or cash or other markets. (In addition to the ‘bubble’ deflation – or maybe triggering it.)
This may be tardy, had some side effects that knocked me down for a couple of days.
Re the cause, effectively the Gulf bourses have been driven by massive over-liquidity plus for some reason the idea of buying equities came into fashion around the same time that (i) placing money in the US became less popular due to the irritating US Patriot Act and all its madness regarding pointlessly costly reporting to make the thumb-suckers feel safer, (ii) petrol prices generally began to rise, (iii) financial sector reforms supported by WB, IMF and US made the bourses much better quality than they were only a few years ago. (Of course all things are relative)….
So, excess capital in region, US far less popular destination of petro-dollars, Euro bourses not that great, local markets look better objectively, plus there are more sophisticated institutions selling the product better…..
Bingo, you got yourself a boom. Wasn’t foreordained, but the factors came together in more or less the right order.
You’ll note much of the madness was added in a frenzy that broke out in the past six months when lots of retail investors noticed the appreciation and tried to get in.
BTW there’s just no rational sense to be found in the Palestinian bourse, it shouldn’t even exist. The Leb bourse is just overflow from Gulf, while Jordan/Amman is Iraqi money fleeing Iraq, largely.
I don’t see anyone getting nervous about “folks on the North side of the Gulf,” Iraq is still far away and the American tub-thumping about Iran is largely convincing to the Americans.
Finally, let anyone belief I am fooling you on the other bourses, here’s a link to the English lang. home page of the Casablanca bourse. http://www.casablanca-bourse.com/homeen.html
If you follow the capitalisation link, you can chart its evolution over any selected period. You’ll see it’s been going sideways since Jan 2006, but the index of liquid shares indicates it is up 24 odd percent this year. (You can chart indices fairly well via the French home http://www.casablanca-bourse.com/home.html see indice, historique)
Otherwise, the story here is largely a domestic one (or a regional one) – the bourses which have been getting Iraqi or Gulf overflows are having a little bit of a panic, and the real issue of importance is how well this will be managed. Badly in one direction and a major panic might blow these guys for a good five years or so. Badly in another direction (state support for pricing) and you rewind the liberalisation of the markets and set a terrible precedent.