QAT - Persian Gulf Stock Markets Hold Their Own In Volatile 2022
Summary
- Over the past five years, the FTSE Russell GCC Extended Index strongly outperformed both the broader FTSE Middle East & Africa Extended (MEA) and the FTSE Global All Cap indices.
- The Omani bourse was the GCC’s star performer in 2022, outstripping the GCC Extended index by nearly 30 percentage points, followed by Kuwait and Bahrain (each outpacing the GCC by roughly 10 points).
- The GCC Extended Index is highly concentrated: the largest 10 stocks comprise 41%, of which 26% are Financials, 8% Energy and 7% Telecom.
By Marlies van Boven, PhD and Alberto Allegrucci, PhD, Global Investment Research
Given the region's status as a leading energy exporter, the Gulf Cooperation Council ((GCC)) equity markets have benefited broadly from the positive economic ripple effects of the post-pandemic oil-price boom, as well as from their negligible exposure to the sharp selloff in global Technology stocks. With the recent reversal of both trends, however, these tailwinds have become headwinds.
Over the past five years, the FTSE Russell GCC Extended Index strongly outperformed both the broader FTSE Middle East & Africa Extended ((MEA)) and the FTSE Global All Cap indices. The GCC markets held up relatively well during the brutal market downturn in 2022, but struggled during the global Q4 rally, falling 5.7% versus the 10% rebound for the global index. The GCC index turned the corner in January but still trailed both the Global All Cap and MEA.
Total index returns (USD %)
Total index returns (USD, rebased)
Source: FTSE Russell. Data through January 31, 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Big performance variances across GCC markets
The Gulf Cooperation Council is an economic and political alliance of six member countries: Bahrain, Kuwait, Oman, Qatar, the Kingdom of Saudi Arabia, and the United Arab Emirates ((UAE)). Saudi Arabia is the largest equity market in the region, accounting for 53% of the FTSE Russell GCC Extended index, followed by the UAE (at 18%). At the other end of the spectrum are Oman and Bahrain, representing a combined weight of 1.4%.
FTSE GCC Extended Index country weights ((USD)) – as of January 31, 2023
Source: FTSE Russell. Data as of January 31, 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
The Omani bourse was the GCC’s star performer in 2022, outstripping the GCC Extended index by nearly 30 percentage points, followed by Kuwait and Bahrain (each outpacing the GCC by roughly 10 points). The biggest laggards were Qatar and Saudi Arabia, which trailed by 4.4% and 1.7%, respectively.
GCC country returns relative to the GCC (USD %)
Source: FTSE Russell. Data as of January 31, 2023. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
On a weighted basis, however, Oman’s contribution to GCC total returns in 2022 was tiny, Kuwait was the most additive to performance and Saudi Arabia detracted significantly. These patterns were magnified in Q4. In January, however, contributions from Saudi Arabia turned strongly positive (less so in Qatar), buoying the GCC index overall, while the UAE was the biggest drag.
Country-weighted contributions to GCC returns (TR, USD %)
Source: FTSE Russell. Data as of January 31, 2023. Past performance is no guarantee to future results. Please see the end for important disclosures.
Financials a major regional swing factor
The GCC Extended Index is highly concentrated: the largest 10 stocks comprise 41%, of which 26% are Financials, 8% Energy and 7% Telecom. Financials dominate both the GCC (48.5%) and MEA (41%), versus 15% for the Global All Cap. The GCC index is also more tilted to Materials and Telecom than the global index, but has far smaller exposures to Technology, Consumer Discretionary and Industrials.
Despite the region’s dominance in the global oil markets, Energy stocks have little representation in the GCC index, as many of these companies are majority owned by their governments. Saudi Aramco, the world’s largest oil company, is predominantly state-owned and only a small listing on the country’s Tadawul stock exchange, following the sale of a 1.5% stake to the public in late 2019. Its planned IPO this year of its energy-trading business Luberef, currently valued at billion, will significantly increase the industry's weight in the GCC index.
GCC Extended Index industry weights (USD %) – as of January 31, 2023
Source: FTSE Russell. Data as of January 31, 2023. Past performance is no guarantee to future results. Please see the end for important disclosures.
As the three charts below show, the GCC index suffered far less than markets elsewhere from the carnage in Technology and Discretionary stocks in 2022, while benefiting more from its large exposure to the relative resilience of Financials. Contributions from Utilities, Health Care and Real Estate stocks also outstripped those of peers in the broader market indices.
The tide turned for the GCC index amid the broad-based Q4 relief rally, when its overweight in Financials was a major detractor from GCC performance, in stark contrast to the stock group’s strongly positive contribution to the FTSE Global All Cap over the same period. As the global rally persisted into January 2023, GCC Financials continued to lag, while the index’s Technology, Consumer Discretionary stocks made little headway in absolute terms and relative to their peers in the global and MEA indices.
Industry-weighted contributions to returns (USD %)
Source: FTSE Russell. Data as of January 31, 2023. Past performance is no guarantee to future results. Please see the end for important disclosures.
Saudi Arabia has by far the largest exposure to Financials (at 47%, or an overweight of 23 percentage points versus the industry's weight in the GCC index), followed by Kuwait (21%, or an overweight of 10 points over that of the GCC index).
GCC Financials weights by country (USD %) – as of January 31, 2023
Source: FTSE Russell. Data as of January 31, 2023. Past performance is no guarantee to future results. Please see the end for important disclosures.
Kuwait was the only GCC market in which Financials posted a gain for the 12-month period ended January 2023, while GCC Financials finished with modest losses, led by their steep declines in Saudi Arabia and the UAE. As shown below, Global All Cap Financials began their recovery in the second quarter of last year, while the stock group bounced back last month in Kuwait after a bumpy final quarter of 2022. By contrast, Financials in Saudi Arabia went into a freefall in the final months of 2022 and have moved sideways so far this year.
GCC regional Financials performances (USD, rebased)
Source: FTSE Russell. Data through January 31, 2023. Past performance is no guarantee to future results. Please see the end for important disclosures.
The lackluster performance of GCC Financials over the past year has coincided with the unprecedented speed of the US Federal Reserve’s rate-hike cycle, which has been largely mirrored by the GCC countries that maintain a currency peg to the US dollar, putting increased pressure on financial-market liquidity and bank stocks across the region.
Interbank policy interest rates (%) – GCC countries
Source: FTSE Russell / Refinitiv. Data through January 31, 2023. Past performance is no guarantee to future results. Please see the end for important disclosures.
The spike in Saudi Arabia’s interbank lending rate to all-time highs has been a particularly stiff headwind for the country’s banking system, which has come under extreme stress despite the recent period of soaring oil prices. This prompted the country's central bank ((SAMA)) to make capital injections to help its banks deal with the liquidity crisis.
Saudi Arabia three-month interbank rate versus bank stock performance (local currency %)
Source: FTSE Russell / Refinitiv. Data through January 31, 2023. Past performance is no guarantee to future results. Please see the end for important disclosures.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Persian Gulf Stock Markets Hold Their Own In Volatile 2022