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The Surge of The GCC Stock MarketsAnd The 2006 Big Correction

Sh. Abdullah bin Soud Al ThaniQatar Central Bank Governor

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GCC Main Economic Indicators

The six GCC states have a total population of about 32 million, 74% of them or 23.7 million is in Saudi Arabia.

The nominal GDP of the group soared in 2006 to $ 718 bn, achieving high rate of growth of about 24% in some countries like Qatar and UAE.

The per capita income hiked in three countries of the group namely, Qatar, UAE and Kuwait to be among the richest in the world.

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GCC Main Economic Indicators in 2006

KuwaitOmanBahrainSaudi ArabiaQatarUAE

No of Population(million)

2.5053.2050,74323,6800,8504,105

NominalGDP )$bn(

81.931.313.1348.752.7190.0

IncomePer Capita )$000(

32.69.7618.114.762.946.3

Inflation Rates% 3.05.51.82.211.87.0

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Inflation soaring but:

The rapid economic growth in the previous 2-3 years has pushed inflation rates to their highest ever levels especially In Qatar and UAE where the rates reached 11.8% and 7% respectively in 2006. However, the soaring rates of inflation are considered to be a temporary phenomena and are expected to come under control in the near future.

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Stock market surging in the 2002-2005 period

The economic booming in the GCC states was well mirrored in most of the states' stock markets.

The main indicators of the stock markets, especially : the No. of the listed companies, the turnover values, the market capitalizations and the market indices, may explain what happened since the year 2000.

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Listed companies doubled

The number of the listed companies has increased notably in the 2000-2006 period to more than double as in The UAE and Kuwait and by 58% or more in Qatar and Oman, while in Saudi Arabia and Bahrain the number has increased modestly.

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Historical Development of the GCC Listed Companies

Saudi Arabia

UAEKuwait

Qatar

BahrainOman

20007627862239113

20017627882343119

20026837952541127

200370441082844139

200473531253045166

200577891583247176

2006861021803650179

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Share prices soaring in 2002-2005

Share prices have increased dramatically especially in the 2002-2005 period. The aggregate increase of the stock index reached 268.4% in Saudi Arabia, 237.5% in UAE, 225% in Qatar, 166.5% in Kuwait, 136.5% in Oman, and 82.55 in Bahrain.

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Historical Development of the GCC Indices performance

Saudi ArabiaUAEKuwaitQatarBahrainOman

200011.3Na2.88.0-14.5Na

20017.623.628.842.9-2.7-24.4

20023.614.524.137.30.326.2

200376.232.163.956.627.442.1

200484.988.411.947.632.123.8

2005103.7102.966.483.522.744.4

2006-52.5-40.3-9.2-37.5-1.914.5

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GCC Stock Markets Turnover

The turnover of the markets or the annual traded share value has doubled also as a result of the increasing listed companies and the soaring share prices. While the aggregate turnover for the GCC markets was less than $ 23 bn in the year 2000, the number doubled two times to $ 61 bn in 2002, and hiked to more than $1600 bn in 2006

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Historical Development of the GCC Stock Markets’ TurnoverValue ($bn)

Saudi ArabiaUAEKuwaitQatarBahrainOman

200017.40.14.40.20.240.6

200122.30.412.10.40.190.4

200235.71.122.70.90.210.6

2003159.12.055.13.20.271.5

2004473.018.251.86.40.461.9

20051103.7140.697.628.30.713.6

20061402.8120.459.220.51.312.3

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GCC market Capitalization

The GCC market capitalization value as well has soared from just $120 bn in the year 2000 to $ 1137 bn in the year 2005 before retreating to $ 734 bn in the year 2006 as a result of the big correction occurred in four of the six markets.

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Historical Development of The GCC Market CapitalizationValue ($bn)

Saudi ArabiaUAEKuwaitQatarBahrainOman

200067.911.021.68.26.65.1

200173.213.728.29.06.64.5

200274.929.935.810.67.65.2

2003157.339.661.526.79.76.6

2004305.983.375.240.413.57.6

2005646.0231.4142.187.117.412.7

2006326.3168.7143.860.921.112.9

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What propelled stock prices beyond a reasonable fundamental base?

Liquidity was the most important factor. Oil revenues have skyrocketed and the GCC countries have accumulated a big current account surplus since 2004.

A large expansion in the credit facilities as the private sector credit roughly doubled between 2002 and 2006. A part of consumer and commercial credits have been redirected into stock investments.

The lack of listed stocks, low free floats and limited alternative assets like bonds led to a lot of money chasing few stocks.

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What propelled stock prices beyond a reasonable fundamental base?

GCC stock markets are dominated by retail investors who are usually more prone to emotional investment behavior than institutional investors like mutual funds and insurance companies.

The means in the GCC central banks to curb this liquidity have been limited since their currencies have been pegged to US dollar and thus have to follow the interest rate move of the Fed. Meanwhile the GCC bond markets have so far remain heavily underdeveloped.

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Reasons for the GCC stock markets' correction

There was no significant or sudden event like oil slump or a political crisis that could be linked to the big correction occurred in the GCC stock market in 2006. Only technical reasons emerged out of the stock markets were behind. The main reasons are:

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Reasons for the GCC stock markets' correction

Prices/Earnings ratios were as high as 50 or more and Prices/Book values ratios as high as 12. This means that the markets reached a case of overvaluation in most of the GCC countries by the end of 2005 or at early stage in 2006.

2- A high profits growth of the companies to justify such lofty valuations could rationally not be expected.

Lack of liquidity especially on days of IPO’s when some investors sell positions in the secondary market to free capital for the still brisk IPO business.

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Current Status of GCC Stock Markets

The valuations of GCC stocks have come in line with valuations of other emerging markets. The average P/E ratio is about 16 and the Price/Book valuations ranged between 2.5-4.

Thus the situation of the stock markets is not bad and has become attractive to international investors.

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Current Status of GCC Stock Markets

There are some issues that have to be addressed in order to avoid the mistakes of the past:

1-Liquidity is still in the region but does not find its way to the stock markets so easily. It needs to be attracted by quality stocks, sound valuations.

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Current Status of GCC Stock Markets

2-Choosing a considerable approach for the IPO’s launching and spreading them out over time is so necessary to avoid hurting the secondary markets.

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3-Investor education and strengthening the influence of the media in the market is necessary.

4-Better regulations and more transparency (Corporate Governance) are badly needed for more healthy trading.

Current Status of GCC Stock Markets