Bombs over Baghdad and rumours of more war are not the ideal ingredients for a bull market. But investors on the stock exchanges of the Gulf are positively euphoric. With the exception of Bahrain, whose stock exchange has been anaemic for years, returns on the Gulf's markers have been remarkable. Lacking in depth, liquidity and investor interest, and located in one of the world's most volatile regions, the gains are, quire simply, perplexing.
Since the beginning of the year, Oman's Muscat Securities Market index has increased by 10%, and despite a large dip in February, Saudi Arabia's Tadawul All Share index had climbed by more than 14% by mid-April. But the biggest stars have been the Kuwait Stock Exchange index and the Doha Stock Market General index, which have shot up by 30% and 18%, respectively since the beginning of the year. With every inch of desert the US and British forces took in Iraq, the indices notched up another point gain. With the collapse of Baghdad and the realisation that resistance had vanished, prices on the Gulf's exchanges soared.
Given the strong Arab resentment toward the war against Iraq, avoiding investment in the Gulf would appear a sound financial decision. But in recent years these markets have confounded traditional wisdom--in the months following 11 September, for instance, the Saudi and Kuwait stock markets boomed. The logical question then is how rational is this exuberance. Peel away the veneer of regional conflict, and the answer is very rational.
First, the removal of the most destabilising personality in the region--Saddam Hussein--is bringing peace of mind to Gulf investors. Most Gulf exchanges were set up in the 1990s and had therefore never known a time when Mr Hussein and his cantankerous and impulsive regime were not in power. Second, the opening of Iraq means that the cash-rich businessmen in the Gulf are finding enormous opportunities right next door. Kuwait is the logical entry-point for trade into Iraq given Iraq's limited coastline, and its businesses are poised to take advantage of their geographical good fortune.
The Gulf markets, taken as a whole, are arguably the best-performing markets in the world. But as impressive as the news is for Gulf shareholders, these markets are not overly investor-friendly. In Saudi Arabia and Oman, for instance, foreigners from non-Gulf Cooperation Council member countries cannot own shares directly; they may only purchase shares through...