Page 245 - Aamir Rehman - Dubai & Co Global Strategies for Doing Business in the Gulf States-McGraw-Hill (2007)

Capable Capital: The GCC as a Source of Capital 227

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May 2007 by taking a 2.2 percent equity stake. Besides being a
promising market for clients, the GCC is becoming a significant
source of equity investment for financial institutions worldwide.

LOCAL STOCK MARKETS: EXPLOSIVE
GROWTH AND MASSIVE CORRECTION

Between 2001 and 2007, the GCC’s local stock markets witnessed
tremendous growth and a severe market correction. For the first
part of this period, local markets went nowhere but up: between
2001 and 2004, total market capitalization in the UAE grew seven-
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fold while the Saudi market more than tripled. One Saudi firm
even had a market capitalization close to Google’s at the time.
Through 2005 and the early months of 2006, the frenzy continued
and “irrational exuberance” akin to the 1990s dot-com bubble on
the Nasdaq market set in. The bulk of investors in the market—an
estimated 70 percent—were individual investors, of which as many
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as 90 percent may have been short-term speculators. These were
the Gulf equivalent of day traders during the dot-com bubble
period—investors with little understanding of or interest in the fun-
damental performance of the businesses they invested in, but eager
to capture returns that could be as high as 5 percent per day. Even
local companies found the frenzy too tempting to resist. In 2004 and
2005, for example, it was not uncommon for companies to have
more “extraordinary income” from gains on the stock market than
operating profits from their core business.
Stock market euphoria in the Gulf got out of hand quickly and
reached extreme heights. Some investors sold their cars to finance
shares, and banks would lend cash to investors to buy stock and
participate in IPOs. Some lending behavior became downright irre-
sponsible. According to the local Saudi press, some lenders could
garner 20 to 30 percent returns in a single week by financing shares;
the Saudi Arabian Monetary Agency needed to intervene. 20 In
Kuwait, lending to purchase shares grew 337 percent between 2000
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and 2005. A sign of the times was that some ATMs were enabled
with brokerage capabilities so that customers could day-trade as
they withdrew cash from their accounts. When a hot IPO was open
to investors from around the GCC, it was not uncommon for nation-
als to drive across borders, sleep in their cars if need be, and stand in