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Why Gulf markets have hit a wall

Further reformis essential if the region’s stock exchanges are to come under the steadying influence of institutional investors.

Last month’s sell-off in the Gulf equity markets was a timely reminder to the region’s investors that nothing lasts for ever. For the past three years the Gulf markets have enjoyed the best of bull runs. Spurred by record oil prices and high levels of liquidity, investors enjoyed a one-way bet that showed few signs of unwinding.

This year the story is different. In mid-March, many of the region’s markets suffered their worst single-day performance in recent years. The Dubai stock market fell 12% to an 11-month low. In Saudi Arabia, the biggest Arab equity market, with a capitalization of $750 billion, shares fell nearly 5%. The Kuwait index tumbled by 3.67% – its worst performance in three years. Qatar and Bahrain also fell.

What were the reasons for the panic selling? The simple answer is that valuations were getting so high that a correction was inevitable. The Saudi index was trading on an average P/E ratio of 40 before the crash and some speculative stocks were trading at twice that level. In some instances the level of demand for Gulf shares was getting ridiculous. But valuations alone cannot fully explain the story. Many of the region’s markets have been in a downturn for months.

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