GCC stock markets had a troubled first half in 2023

Headwinds faced GCC stock exchanges in the first half of 2023, writes Ahmad Abdul-Rahman.

Morgan Stanley Capital International's (MSCI) global index jumped 13 per cent in the first half of 2023, despite escalating volatility and uncertainty. This compares to an increase of only 0.3 per cent in the Gulf Cooperation Council (GCC) countries indices. Moreover, the decline in oil and high interest rates pushed investors away from the region.

Stock markets in the oil-rich Gulf countries lagged behind the awakening of global markets during the first half of this year. Analysts and specialists in financial markets attributed this to several factors, including the drop in crude prices and tightening monetary policies, which led investors to search for opportunities in other regions around the world.

The GCC markets were affected by the negative performance of oil amid challenging demand and complex supply expectations. Crude prices fell about 12 per cent in the first half of the year, as China's economic recovery lost momentum, and traders feared a possible recession in the US. Strong exports from Russia and Iran also kept supply ample.

Overall, the performance of GCC stocks was disappointing in the first six months of 2023 compared to their counterparts in the global markets.

Noticeable disparity

GCC stock indices showed remarkable variation in the first half of 2023. The Dubai Financial Market (DFM) topped the region's markets in the first half of this year, with its index rising by about 14 per cent. This was followed by the Tadawal All Share Index (TASI) in Saudi Arabia, the largest market in the region, which rose by about 9 per cent. In contrast,

In contrast, the Abu Dhabi Securities Market (ADSM) index came at the top of the losers, after losing about 6.5 per cent of its value. This was followed by the Qatar Stock Exchange (QSE) index, which lost about 6 per cent, the Kuwait Stock Exchange (KSE) index which fell by 3.6 per cent, the Bahrain All Share Index (BASI) which rose by only 3.3 per cent.and the Muscat Securities Market (MSM) index which rose by only 1.8 per cent.

The decline of the banking sector

Raed Diab, vice president of research at Kuwait-based Kamco Invest, said that the GCC markets were affected by the decline of the banking sector, which dominates the GCC markets. This sector has more than 50 per cent of the value of the region's markets. Saudi Aramco is the exception, dominating the Saudi stock exchange. The value of the banking sector index decreased during the first half of 2023 by 1.6 per cent.This was along with a decline in the capital goods index which fell by 7 per cent. Together, the gains in the rest of the sectoral indices in the GCC almost completely erased the gains achieved in the rest of the sectoral indices, which led to relative stability in the performance of the MSCI Composite Index for the GCC.

Diab expects that the region's markets will witness slight gains during the second half of this year, supported by high profits of the banking sector. The full impact of higher interest rates will be reflected in profits as well as lending growth once interest rates are lowered later this year or next. Diab also said that the energy index will remain at current levels. It is expected that production cuts implemented by "OPEC+" will ensure prices remain at current levels.

Headwinds

Financial analyst Waddah Al-Taha said the following: "Gulf stock markets were weaker than their global counterparts in the first half of 2023, affected by adverse winds, including the high cost of borrowing, the decline in growth expectations, and the volatility of oil prices."

Al-Taha added that the number of the initial public offerings (IPOs) in the region is expected to contribute to maintaining the interest of international investors in the second half of this year, especially since GCC stocks are currently lower in price than their global counterparts. He explained that one of the main factors that support the positive performance of the Gulf markets, especially the increase in its correlation coefficient to the highest level with positive movements in the US markets.

Low oil and high interest

Jamal Ajaj, a financial analyst at BH Capital for Financial Services, said that the GCC stock markets were clearly affected by the decline in oil prices, as well as the continued increase in interest rates. The latter raised the cost of funds for the purposes of financing investment in shares. Ajaj pointed out that the presence of good and influential foreign investment has led to maintaining the relative cohesion of the markets.

He added that investors have some fears of a deterioration in external factors, such as inflation or economic growth. He explained that GCC stock exchanges are emerging markets and are not comparable to their global counterparts, which have investment depth and the presence of large and varied market makers. These are only available in the region to a small extent, he added.