Is it time to reduce exposure to GCC stock markets and increase allocation elsewhere? Asiya Investments posed this question in its latest study on GCC economy.
In annual terms, GCC public equity performance is one of the best this year, Asiya noted. The Dubai stock market generated a return of around 25 percent since January, closely followed by Qatar.
Bahrain’s rose more than 10 percent year-to-date. Gains came in the first half of the year, between January and June, with investor sentiment boosted by the announcement of UAE’s World Expo 2020 and the upgrade of UAE and Qatar’s stock exchanges from frontier to emerging market status.
But, in the last few years, the economy of the region has thrived on two other factors: strong investments inflows driven by geopolitical instability in the Middle East, and high oil prices.
Since June, the oil pillar is rapidly waning. A long period of low prices will put pressure on the region’s fiscal balances, reduce investments, and slow down growth in government employees’ salaries which would lead to lower household consumption.
Investors are reducing their exposure to sectors most likely to be affected, driving the region’s markets into decline. In the last six months, the Dubai stock market has fallen 13 percent, Kuwait and Saudi Arabia around 8 percent each, and Qatar and Bahrain 1-2 percent. Financial markets in the GCC have not decoupled from oil prices.
On the other hand, other economies are benefiting from lower oil prices. Asia is home to four of the five top oil importers.
China, India, Japan and South Korea’s firms benefit greatly from lower energy costs. Their stocks have seen great performance since June, to a great extent due to domestic factors.
In India, the new government, elected thanks to its strong calls to instill reforms, has brought confidence to investors.
But one of the key reforms, the reduction of fuel subsidies, was implemented taking advantage of lower oil prices.
In China, the stock market is rallying on the back of government stimulus and financial sector reforms, but low oil are already having an impact on expectations of corporate earnings. The longer oil prices stay low, the better the Asian markets will perform as a whole.
The global economic environment has stabilized lately, and markets are being driven by two major factors. First, the sharp decline in oil prices, which fell by a third since June, helping consumers and non-energy firms, while hurting energy players and oil-exporting governments. If oil prices remain low, this could be a good moment to reduce exposure to the GCC.
The second driver is the appreciation of the US dollar. The end of the US Federal Reserve’s quantitative easing program, coupled with the strong expansionary policies of the European Central Bank and the Bank of Japan, is rising the value of the US dollar, which has gained around 10 percent this year.
This article was first published in the Saudi Gazette on December 8, 2014.SHOW MORE