Last Updated: Sat Mar 03, 2012 17:22 pm (KSA) 14:22 pm (GMT)

The Arab stock markets’ latest rally: A new bubble?

Nadine Hani

The surge this week of Middle Eastern stock markets was surprising. The Saudi market jumped to its highest level since September 2008 and the Dubai market hit its record level in 10 months. The daily value of trading in the two markets was the highest in two years. The Egyptian market soared by 40 percent since the beginning of the year. What is the reason for that?

The regional markets have witnessed five crises in five years. During this same week in 2006, the Saudi stock market collapsed from its record levels and washed away the wealth of Saudi investors, some of whom were encouraged by earlier market gains to invest in stocks although they lacked the skills to invest. Hence, the losses were heavy. The rest of the regional markets, especially Dubai, followed suit. This was exacerbated by successive catastrophic events, from the international financial crisis, the Dubai debt crisis and the collapse of its real estate market, to the European sovereign debt crisis and the Arab Spring.

In the midst of those dire conditions, investors lost hope, and stock prices and trade volumes continued to plummet. But since the beginning of 2012 the trend reversed as markets began to pick up sharply.

Complex are the reasons behind this surprising change. In the United States, the Federal Reserve injected tremendous amounts of liquidity into the financial sector and pledged to keep interest rates low until 2014. In Europe and in a bid to contain the impact of the debt crisis on banks, the European Central Bank (ECB) instituted a program of making low-interest loans (1%) with a term of 3 years available to European banks, a program known as Long term refinancing operations (LTRO). Also, the Bank of England announced additional quantitative easing, pumping an extra £50 billion ($79.2 billion) into the economy. In Japan, the central bank increased its quantitative easing by 3 trillion Yen ($36.8 billion). Meanwhile, China, Brazil, India, and Indonesia decreased the reserve requirement—which frees up more money for banks to lend than before.

So, where does all this “cheap” money being released go to?

As banks’ appetite for lending decreased, they began to look for venues to invest this money, thereby raising the value of assets like sovereign bonds and stocks. The Nasdaq composite index last week hit 3,000 for the first time since 2000, and the Standard & Poor’s 500 index rose to its highest level since 2008.

These developments dispelled the fears that banks will continue to toughen their stance on refinancing existing debts in our region. And in light of the declining possibility of profitability in the regional real estate markets, all that liquidity started to look for other venues. Regional stocks’ PE ratios were attractive. UAE markets had a price/earnings (PE) ratio of about 8 times and the Saudi markets 11 times. These ratios are less than the average 12 PE Ratio of global emerging markets. This makes regional markets more attractive. In addition, most UAE markets have announced dividends that give a yield of more than 6%.

On the other hand, the increased tension with Iran drove oil prices up, and since Saudi Arabia is the top oil exporter, some investors who bet on increased oil prices buy Saudi stocks as a proxy for oil, although the Saudi market is not yet open for foreign investors except through a complex process called “swap agreements.”

These factors prompted domestic investors to speculate on stocks in anticipation of what may come. Speculation is legitimate and necessary, but the problem is when inexperienced investors return to the markets to make quick gains. If this happens we would then fall back into the same old pit. Can memories be that short?

The writer is a senior business news presenter at Al Arabiya and can be reached at She can be found on Twitter at: @Nadine_bn. This article was first published in An Nahar newspaper on March 2, 2012 and translated by Mustapha Ajbaili, who can be reached at:

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