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Middle East equity markets face test

Poised between stellar growth and a spectacular new collapse.

By Tom Everett-Heath

Balloon rising or bubble about to burst? The stock markets of the Gulf are attracting growing attention as much for warnings of impending crashes as for their extraordinary bull run. The markets of Saudi Arabia, the UAE and Kuwait have appreciated by 132%, 189% and 63% respectively. But in July, a 19.5% correction in the UAE has been seized on by some as the first sign of an impending string of market crashes. Others simply point to the health of the underlying economies, the oil-fuelled surge in liquidity and spectacular corporate profit growth.

Nomura, in a research note entitled The great Arabian bubble, published in late June, was the first international house to go publicly negative on Gulf markets. Regional investors were troubled by provocative comparisons between Gulf stock prices – especially Saudi Arabia and the UAE market – and the Japanese real estate bubble of the 1980s and the Nasdaq bubble of the late 1990s.

A compelling case can be made for the notion that markets are becoming overvalued. Saudi banks –vibrant as they are – look a little expensive trading on P/E ratios in the high 30s, as most were in mid-August.

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