Shaping the fate of the Gulf’s capital markets

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Last year was mixed for GCC capital markets. It brought a stellar 22 percent gain in Dubai’s DFM and 14 percent gain in Saudi Arabia’s Tadawul, contrasting with a mere 4 percent rise in Bahrain and 1 percent gain in Qatar.

Oman declined by 7 percent, Kuwait lost 7 percent and Abu Dhabi fell 6 percent. 

The macro variables that will shape the fate of GCC capital markets include crude oil prices, expectations of easing interest rates and a decline in the US dollar trade weighted index.

There is also the potential upgrade of South Korea’s status from emerging to developed market that will lead to a redistribution of its 12 percent weightage in the MSCI Emerging Markets index. 

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This means a 1 percent increase in the country weight of Saudi Arabia and 0.5 percent each for the UAE, Qatar and Kuwait.

In addition, an increase in FDI and limits on foreign ownership in Saudi and UAE equities, as well as increased issuance of Eurobonds/sukuk by GCC corporates, will add to the depth of regional capital markets.

Stock markets alone do not reflect the scale and nuances of economic activity in specific GCC countries.

Oman’s stock market performance, for example, was due to draconian cutbacks in public spending and a successful fiscal consolidation strategy that led to the sultanate’s budget break-even price for crude falling from $90 in 2017 to just above $70 now. 

Hopefully, Fitch’s increase in Oman’s credit rating from BB to BB+ with a stable outlook is a prelude to a potential upgrade to investment grade status as the sultanate reduces its external debt to 35 percent of GDP and thus its vulnerability to liquidity shocks.

Sector rotation may also be a dominant theme in GCC capital markets.

For instance, Saudi Arabia’s Tadawul All Shares Index (TASI) is the largest stock market index in the region and has no less than a 40 percent weighting in Saudi money centre banks.

If interest falls sharply in 2024, it is realistic to expect investors to reduce their allocations to mega-cap Saudi banks like Al Rajhi and Saudi National Bank in favour of more domestic mid-cap companies that benefit from Vision 2030-related mega projects, as well as the Riyadh expansion scheme. 

Yet decelerating global growth and the economic crisis in China will be negative for Saudi petrochemicals, making it likely that TASI could well underperform even while specific midcap Saudi shares are re-rated. 

The TASI’s 18 percent valuation multiple trades at a premium to MSCI Emerging Markets that is simply not sustainable, especially since China is the kingdom’s largest oil export market and trading partner.

This negative data point is offset by a resurgence in Saudi economic indicators as Vision 2030’s impact increases and the kingdom’s construction companies begin to win tenders for the Expo 2030 and 2034 World Cup.

The robust pipeline of IPOs that began two years ago will continue to broaden and deepen the equity culture in Saudi Arabia.

Dubai’s spectacular property boom and a fall in interest rate expectations, higher government spending and a number of bellwether IPOs spawned Dubai’s DFM bull market in 2023.

It is reasonable to expect that UAE stock markets will continue to lead the GCC equity performance league table. The UAE is the most networked and globalised economy in the Middle East and its policy to use IPOs as a magnet to attract global capital flows is bullish for its stock markets.

Geopolitics, as always, remains a wild card in the Middle East.

The Gaza war has sent shockwaves across the region and the military confrontation between the Houthi rebels in Yemen and a US-led naval coalition has led to draconian shifts in tanker traffic and container shipping in the energy chokepoints of the Suez Canal and the Red Sea. 

Any escalation of geopolitical risk in Lebanon and Iran could have a shock impact on crude oil prices, the US dollar, risk premia and interest rates and thus adversely impact GCC capital markets.

A severe global recession is also a negative sword of Damocles for a region that is still dependent on the sale of fossil fuels.

Matein Khalid is the chief investment officer in the private office of Abdulla Saeed Al Naboodah and the CEO designate of a venture capital firm. He is also an adjunct professor of real estate investing and banking at the American University of Sharjah