Gulf markets are just too expensive, even after the crash

Last month, Oger Telecom cancelled its flotation on the Dubai stockmarket, citing "challenging and volatile" market conditions. That's putting it mildly: after a three-year bull run, driven by the oil boom and a new tendency among Arab investors to keep their money close to home, Gulf markets have plunged this year. Saudi Arabia, the biggest market, has slid by more than 60% from a record 20,000 reached in February. The Riyadh bourse has dragged down other markets, with Dubai and Kuwait now 50% and 20% off their early 2006 highs.

It's been a "classic bubble", says Fortune. Saudi p/e ratios reached 50, while it has hardly helped that a mere 10% of regional investments are held by institutions. There is now a "tremendous overhang" of "upset" retail investors who got "sucked into the bubble", Anais Firaj of Nomura told the FT.

And disenchanted small investors aren't the only reason why more turbulence may lie ahead. Lex in the FT notes that in Dubai, where real-estate stocks dominate the index, concern is mounting about an overhang of properties, while banks which are strongly represented on stockmarkets "lent heavily" to individuals to fund stock purchases. While regional valuations are more reasonable now the average is around 13 times 2006 earnings the Saudi market is on a p/e of 16, still too expensive to entice institutional investors, according to Khan Zahid of Riyadh Bank.

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On the plus side, profits are expected to remain strong next year as high oil prices keep economies buoyant. But with Gulf companies largely excluded from the benchmark emerging market index and foreign ownership restricted in the region, emerging market funds have yet to be attracted to the Gulf; hedge funds have been the pioneers. Investors have also criticised disclosure and management standards. Saudi Arabia in particular "fails badly on governance", says David Fuller on Fullermoney.com, and "needs to convince the world it is truly willing to reform".