How far will Gulf stock markets follow a global sell-off?

To judge from the Dubai Financial Market yesterday Gulf stock exchanges are reacting ahead of a likely further correction in global markets this week. The DFM had its worst day since the Dubai debt crisis of mid-December, and fell five per cent.

Dubai is the regional commercial hub city so global trends are most keenly felt here. But with the index now at 1,570 points there is not far to go to challenge the low of 1,433 from last March, when the S&P famously hit a low of 666, the devil’s bottom.

Gulf stocks already low

It would be easy to conclude therefore that Gulf stocks are already very depressed, while clearly the S&P at 1,091 still has a good deal of downside. If you make the same comparison with India and China then stocks are even more inflated in value in those countries, and so have even further to fall.

However, it is also not hard to imagine a scenario that would take Gulf equities into deeply oversold territory, the type of manic market downside that is often a signal for a true market bottom. The psychological analogy is Mr. Market having a really bad day and over-reacting to bad news, and making it seem even worse.

The trouble for Gulf stock markets is surely that they are looking pretty bombed out with oil prices still very healthy at around $75 a barrel. If this is all that they can manage with oil priced for an economic recovery what will it be like if oil prices take a tumble as they did at the end of 2008 to $32 a barrel?

Market bottom

This is the sort of shock that would send Mr. Market into a depression. There would be a genuine reduction in regional cash flow, and a danger of some more project slowdowns and cutbacks. Bank bad debts would look more of an immediate problem.

Immediate business prospects would also not be bright. Dubai would be bruised by a further global slowdown in travel and tourism as well as further pressure on bank finance. But having absorbed the problems of the first financial crisis, a second one might not really come as such a great shock.

Indeed, the core business of Dubai as a regional business centre would continue, as would the regional exports of hydrocarbons. From a stock market perspective Mr. Market’s manic reaction would be the perfect buying opportunity, with a temporary hysteria not backed up by the strong fundamentals like the world’s biggest reserves of oil and gas.