Middle East heads the pack in buoyant year for stock markets

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The Independent Online

The vast wealth generated by the high oil prices of the past year meant that Middle Eastern stock markets emerged as the most successful in 2005.

Markets in Egypt, Dubai, Saudi Arabia and Lebanon have doubled and several more have seen returns of more than 50 per cent, as rich families have looked to plough cash into investment opportunities across the region.

A property development boom and an equity market boom are going hand in hand, particularly in Dubai, which is styling itself as the financial capital of the region and which is often described as the world's biggest construction site.

But Egypt has emerged as the world's best performing stock market in 2005, with petrodollars from neighbouring countries spilling over into a market where trading is being liberalised and made more efficient. There is also enthusiasm for privatisations and for the forthcoming opening up of the banking system to foreign takeovers.

Unlike during the oil spikes of the Seventies, more domestically generated wealth is being kept in the region and there has been a trend for the repatriation of investment previously directed to the US since the terrorist attacks of 11 September, 2001.

Oil, mineral and metals wealth and international speculation have pushed the Russian and Colombian equity markets into the top 10 global performers this year, and the latter has additionally been spurred by mega-mergers in the banking and cement industries and the $5.6bn takeover of its brewing giant Bavaria by the UK's SABMiller.

The high oil price is also partly to blame for the relative underperformance of stock markets in the former tiger economies of Asia. Ben Rudd, an investment strategist at ABN Amro, said: "The consumer cycle in these countries has started to turn down. There has been a significant build-up of household debt and then there has been a very sharp squeeze because governments, which up until this year subsidised fuel, have forced the consumer to pay for oil."

The UK market outpaced the US, which put in a lacklustre performance despite the strength of the US economy. The FTSE 100 closed yesterday at 5,618.8, up 16.7 per cent since the start of the year. The oil giants BP and Royal Dutch Shell, the UK's two largest companies, have seen their shares rise by more than a fifth. Mid-cap stocks rose 26.8 per cent, reflecting merger and acquisition activity, while the London Stock Exchange's market for smaller companies, AIM, rose just 4 per cent.

Darren Winder, a strategist at UBS, said the greater valuations put on US stocks since the late Nineties have been eroded as investors question whether other major economies will grow more strongly over the next decade or so. The Japanese market put in the most significant rise of any major equity market in 2005, thanks to an easing of deflationary pressures and the re-election of a prime minister committed to structural reform of the economy.

But in Venezuela, the country's oil wealth failed to prop up the stock market in 2005, as investor concern grew over the socialist policies of the president Hugo Chavez, over political unrest in the country and over its increasingly confrontational relationship with the US.

And, counter-intuitively, it was another dire year for the Chinese market. The Shanghai Composite Index hit an eight-year low in June and has recovered little since, leaving it down 8 per cent on the year. Although the Chinese economy continued to register soaraway growth, the stock market has remained in the depths of depression. Every one of the country's 1,200 companies is majority owned by the state and is feared to ignore the interests of other shareholders. Local market players have persistently called on the government to dispose of its majority shareholdings and free up the market, but such requests have fallen on deaf ears.