GCC Equity Markets Shed $21bn In Q2, Iraq Triggers Correction

GCC equity markets experienced a strong correction in the second quarter of 2014, triggered primarily by the deteriorating situation in Iraq, according to a report by National Bank of Kuwait (NBK).

As of the end of June, GCC markets’ capitalisation stood at $1.06 trillion, having shed $21 billion in Q2, the report found. The S&P GCC index was off by 1.8 per cent during the quarter, reducing gains from the beginning of the year to eight per cent.

Among regional markets, the Dubai Financial Market (DFM) saw the biggest correction, declining 11.4 per cent. However, DFM remained the best performing market in the region year to date.

Bahrain Stock Exchange (BSE) was the best performing market in Q2 2014, gaining 5.2 per cent, followed by Oman’s stock market with a 2.2 per cent gain. The Saudi market was flat on the quarter while all remaining GCC markets were off.

“The recent political developments in Iraq have been the main factor behind the retreat of regional markets,” NBK said.
“However, other country and stock specific factors helped fuel what has been seen as an overdue correction.”

Markets in the UAE saw the selloff begin when the central bank warned in early June of a possible bubble in the residential real estate markets in Dubai and Abu Dhabi.

A major selloff in Dubai builder Arabtec’s stock, triggered by the CEO’s sudden resignation and worries about continuing support from its stakeholder, Aabar, also affected the wider DFM.

In Qatar, controversies surrounding the hosting of the 2022 World Cup event “encouraged the correction” on the index, the report said.

However, although regional markets underperformed their international counterparts in Q2, they continued to fare relatively better year-to-date, thanks to their strong performance during the first five months of the year, NBK found.

GCC markets had seen strong rallies in the first five months of 2014, led especially by gains in UAE and Qatar. The decision by MSCI to upgrade the two nations to emerging market status from frontier markets – which took effect in June – gave a strong boost to regional markets.

The outlook for the GCC economies also remained favourable when compared to emerging markets that continued to show signs of weakness, said the report.

Solid fiscal positions supported by high oil prices promised strong development spending. Corporate profitability, which picked up and is expected to continue to improve, also fed into the regional rally.

The positive sentiment could again pick up in the third quarter, the report stated. GCC markets have been quite volatile since the end of Q2, 2014. Dubai’s market in particular gained 16 per cent in the first week of July.

“Investors remain quite optimistic about the region despite the strong declines seen in June as the GCC continues to have a positive outlook in the medium term,” the report added.