US rescue plan will help boost Gulf markets when they reopen, say analysts

Gulf stock markets reopen after the week-long Eid al Fitr holidays, with investors still nervous.

Gulf stock markets reopen today after the week-long Eid al Fitr holidays, with investors still nervous despite the US government passing a historic $700 billion (Dh2.57 trillion) bailout plan on Friday. The end of summer and the close of Ramadan are traditionally times of more robust trading, when retail investors return to Gulf bourses after a month-long hiatus. But with a widening credit crisis now extending its reach into the Gulf's financial institutions, analysts warned the outlook was clouded, if initially optimistic.

"There is inevitably going to be a positive initial reaction to this [rescue package]," said Mohammed Salih al Hashemi, the head of asset management at Abu Dhabi Investment Company, a government-controlled financial services firm. "Gulf investors may respond with greater vigour to the US bailout plan than US investors. Had it not been approved, conditions globally would have been more difficult to fathom."

Investors may draw some comfort from the news that two of the UAE's largest mortgage firms, Amlak Finance and Tamweel, have entered merger talks, a move that could help strengthen the country's banking sector. According to Nabil Farhat, a senior partner at Al Fajr Securities in Abu Dhabi, there could be a period of calmer, more stable market trading. "The perception is that volatility in market will slow down," he said. "There will be less worry on [foreign investors] withdrawing their funds."

He predicts foreign investors may continue a wave of liquidating assets in Gulf stock markets that began in earnest more than three months ago. However, he thinks the return of retail investors following the close of Ramadan will help absorb some of this capital flight. The global credit crisis has sparked worries that the UAE is entering its own "credit crunch". Credit that has financed the freewheeling expansion of the UAE's economy - from property, to tourism, to aviation - is beginning to tighten and become more expensive. Investor sentiment has been cheered on speculation that government institutions would act further to shore up Gulf economies. Some of this speculation has centred on the Central Bank's emergency bailout package of Dh50 billion, although no bank has yet admitted tapping the funds. There has also been talk that sovereign wealth funds, which have traditionally invested funds abroad, may redirect their activities into the UAE market.

In the US, stock markets dipped after Congress passed the bill. Initial enthusiasm soon gave way to a wave of selling due to fears that the country is about to enter a recession. Earlier in the week, George W Bush, the US president, had warned that the US could face the worst economic crisis since the Great Depression if it failed to pass the measure on its second attempt. "We have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country," Mr Bush said after the plan had been passed. He added however that the US economy "continues to face serious challenges".

US stock markets on Friday were weighed down by other sobering news, such as the recent announcement that the US economy lost 159,000 jobs last month compared with 73,000 job losses in August. Gulf investors, meanwhile, will be setting their sights on third-quarter results. With the heavy reliance on the property market in the Dubai economy, Mr Hashemi also said many eyes would be trained on the Cityscape international property show, which begins tomorrow.

"People are monitoring this very closely for signs of supply and demand," he said. "This could be a very crucial week for Dubai." One silver lining of the financial uncertainty has been stocks that are heavily undervalued. Mr Farhat said UAE equities were probably the lowest in the GCC, particularly property companies. But investors may still opt to wait on the sidelines as the smoke clears from the global credit crisis. "Right now, the market is controlled by sentiment more than fundamentals," he said.