Take stock for some good news

Gloom, as evidenced in these pages by the Financial Times' Paul Murphy just recently, seems to be the order of the day, at least in the West. I read Murphy's article with a growing sense that we had not yet seen the worst of the economic depression sweeping America and Europe, and that more pain would be forthcoming from those parts before we could hope for an upturn. In particular, the property market seems fated for a slow and stressful time, with yesterday's pessimistic prognosis from HSBC that there will be no recovery in US property this year.

And yet, even as we digest the latest dose of bad medicine, there are a couple of reasons to think that perhaps the equity market, and in particular the equity markets in this part of the world, might escape further serious damage in the current recession. Equities are a leading indicator of economic health – they tend to fall before the full effects of a downturn hit the lives of ordinary people and their everyday concerns, but also tend to begin their recovery before those problems have bottomed out. How quickly they do so is regarded by some analysts as an indication of the depth and longevity of a recession.

Last week there was around $20 billion (Dh73.4bn) raised on the world's capital markets, mainly by western financial institutions and emerging market corporations. Some took the form of IPOs, which are among the first casualties of a full-blown recession. The return of IPO activity to the world's markets may be taken as an early indicator things are getting back to normal.

The financial institutions that tapped the markets were mainly big banks, like Royal Bank of Scotland and HBOS of the UK, which both raised multi-billion sums to fill the gaping holes in their balance sheets caused by the sub-prime crisis and the credit crunch. The fact that these were damage-repairing cash calls rather lessens their symbolic value as good news – you could view it as sending fresh reserves into battle because the casualties were so high – but at least the world's investing institutions had those reserves to send, and did so willingly, tempted by huge discounts to market prices.

The time to really worry would have been when the investors sat on their hands and left all those new shares with the underwriters.

There will be other rights issues by big international banks, or fire sales of assets such as appears to be happening at Citicorp, but the issuers will be more relaxed now that the initial cash-calls have got away as planned. It shows there is still life, and liquidity, in the financial markets. The other new issuers were mainly from emerging markets, with the Russians and East Europeans strongly represented. This is an indication that there is still hope the major damage may still be quarantined in the west, as many in the Middle East have argued ever since the crisis broke last summer. The strong balance sheets of the region's corporations and sovereign wealth funds, and the unquenchable thirst of the region for big infrastructure projects, should in theory mean a steady flow of funds into the Middle East.

There is another reason to think the Gulf financial markets are beginning to reflect this regional optimism. The indices are making the kind of juddering upwards lurches that are often regarded as the end of a bear run and the start of a bull phase, but more encouraging are the volumes of shares that are being traded.

Figures released yesterday by the Abu Dhabi based Arab Monetary Fund showed that the numbers of shares traded in the first quarter of the year rose dramatically, with a near four-fold increase over all the regions exchanges. Abu Dhabi led the way in this, the total traded on the ADX rising seven times to more than $20 billion over the period. The Dubai Financial Market showed bigger turnover but from a higher base – a three-fold increase to $34bn being reported over the period from DFM.

Commentators put the improvement down to high levels of liquidity, investor confidence, strengthening of the regulatory framework and the return of big foreign investing institutions. All these positive factors bode well for the investment climate in the region, which should experience a record year. It looks as though the share-dealing habit is returning to the Gulf, led by the UAE.
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