Stock markets in the Gulf States are getting crushed by low oil prices
Amid talk that the oil-rich countries of the Gulf Cooperation Council (GCC) enjoy a certain immunity to low oil prices—at least enough to keep the big boys of OPEC from becoming desperate enough to cut production—Gulf stock markets are not immune, and they’re falling right along with oil—hard and fast.
Since crude oil prices started their downward spiral in mid-June 2014, the Saudi Arabian TASI has dropped 39 percent, the Dubai Financial Market General Index (DFMGI) has lost 34 percent and the Kuwaiti exchange is down 28.7 percent. Comparatively, the Qatari Stock Exchange fell by 22.7 percent, Oman’s MSM 30 index fell by 21.52 percent and the best performer is the Abu Dhabi market which has corrected only by 11.5 percent. In stark contrast, crude oil prices are down 71 percent during the same period.
The Saudi Arabian market trades volumes higher than many emerging markets such as Russia, Mexico and South Africa, but there is a high correlation between oil and the Saudi markets. Oil is down 78 percent from its all-time highs, and the Tadawul All Shares Index (TASI) is down 71 percent from its highs.
Four important gulf markets—the TASI, DFMGI, QSE and ADX—are significant in their own right, but also provide us with the bigger Gulf markets picture. TASI is important because Saudi Arabia only opened its markets to foreign investors in June 2015. The UAE’s DFMGI is significant because it receives a large amount of foreign funds, and indeed was the second largest FDI recipient in the West Asia region after Turkey in 2014. Qatar is a key market to look at right now, in part because it will be hosting the 2022 FIFA world cup.
The Saudi markets follow oil closely
Saudi Arabia is the de facto leader of OPEC, and it also receives a large portion of its revenue from the energy sector. The charts show that the Saudi markets move in tandem with oil prices, and will continue to do so in the near future. With a few experts expecting the price of crude oil to remain in a tight range, the TASI will follow suit.
Dubai markets affected by consistent low crude price
The Dubai markets are the second worst performing markets in the Gulf. “Today, Dubai’s economy is much more diversified than 2008-2009,” recently noted Sami Al Qazmi, Director General of Department of Economic Development for the Government of Dubai.
According to the Mubasher, the oil and gas sector, which contributed 55 percent of the GDP in 1981, accounted for only 2 percent of the GDP in 2014.
Though the Dubai markets are well diversified, the Saudis are among the largest investors in Dubai real estate, and a large drop in oil prices will hurt the real estate sector and be reflected in Dubai’s financial sector. What comes around goes around.
Abu Dhabi markets are the most resilient
The Abu Dhabi Securities Exchange has been the best-performing of markets in the Gulf region. Abu Dhabi achieved 5.5 percent GDP growth in the third quarter of last year. Most of the decoupling from oil is because non-oil sectors and activities contribute more than 60 percent towards the GDP.
Qatar is buoyed by FIFA world cup infrastructure projects
The resilience of the Qatari market can be attributed to the strong growth of 6.4 percent expected in 2016 and beyond. More than 60 percent of the GDP comes from the non-hydrocarbon sector. Qatar will host the FIFA World cup in 2022, and the Government is spending $182 billion on infrastructure in the next five years, as it’s bound by a deadline due to the upcoming event.
Contrary to the general perception, the entire Gulf region is not singularly dependent on oil revenues. A few of the Gulf markets that have diversified their economies are decoupled from a fall in energy prices. Investors should monitor the crude oil prices closely and formulate a strategy depending on the quantum of rebound expected over the next year or two.
If oil prices rebound from current levels, all the markets will recover, but the Saudi markets will find it difficult to reach their former glory unless we see a considerable rebound in prices.
However, markets like Qatar and Abu Dhabi will benefit even if oil enters a higher range of $45-$60/barrel, because their non-oil sectors will continue to outperform and the oil sector will no longer be a drag on the economy. But if crude oil prices drop further, most of these markets will come under a firm bear grip.