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And you thought crude oil prices and GCC stocks plunge together

March 2016

By Fareem Chagla

March 7, 2016 | 11:00 | Dubai

Source of Chart: Investing.com

Source of Chart: Investing.com

Oil price slump has traditionally been believed to cause stock markets in the gulf region to fall and plunging oil has often been blamed for leading the regional stock market lower. However, this view may not be 100% true, a research by Wealth Monitor Intelligence reveals.

Source of Chart: Mena 2016 Outlook, Franklin Templeton Investments

Source of Chart: Mena 2016 Outlook, Franklin Templeton Investments

Recent headlines across the globe have resonated fears of a global slowdown. A direct fall out of the same is expected to keep downwards pressure on oil prices. Having corrected over 70% in the last 18 months to the current levels of around $35/bbl, the supply side is being looked at as a savior. Focus over the last few weeks around the deal between Russia, Saudi Arabia, Qatar and Venezuela on freezing production reflects the same.

This fall in crude prices has been a major source of concern for investors in the Middle East and North Africa region. The general notion of the over dependence of these economies on oil has bought to the fore fears of increasing rating downgrades and fiscal concerns. Bassel Khatoun, Chief Investment Officer, MENA Equities, Franklin Local Asset Management prefers to take a more balanced approach amidst these cries of doomsday and opines that one needs to take a more measured view. In his opinion, the MENA economies are not entirely dependent on oil. Besides having amassed considerable foreign exchange reserves to cushion potential deficits, they boast of highly under leveraged debt-to-GDP ratios and have been making a concerted effort to drift away from the oil dependency. He goes on to highlight the decline in the regional equity markets over 2015 being largely in line with other emerging markets rather than the fall in energy prices.

Source of Chart: Wealth Monitor Intelligence, Investing.com

Source of Chart: Wealth Monitor Intelligence, Investing.com

Wealth Monitor Intelligence has mined the data of the regional stock indices over the last 10 years to try and understand the correlation of the equity indices to the of crude oil prices. What comes out is a clear change in relationship; while most regional indices have had a positive correlation over the 10 year period, an analysis of the last 3 to 5 year period indicates the change in that relationship, thus reflective of a reducing dependency of these markets on crude oil prices. Of these 4 major indices analyzed, 3 have seen a complete change from the earlier direct correlation.

Wealth Monitor Intelligence interacted with M.R. Raghu, Managing Director, Marmore Mena Intelligence to understand his views on this negative correlation. “In the recent years, the correlation between GCC stock markets and oil prices have moved to a different terrain. GCC markets react negatively to the fall in oil prices but do not react the same way when oil price surges. This could be due to the continuous diversification efforts made by the Governments in steering away the economy from being hydrocarbon dependent. However, the implementation and execution of diversification plans have varied. This could possibly explain the positive correlation in the case of Saudi Arabia during the short-term period,” he says

“The degree to which the GCC markets react to crude prices vary depending on the economic structure. In the long term, oil prices have little effect on the stock market movements. However, in the short-to-medium term multiple variables are at play that determine the movement of the markets. Fiscal reserves, whose longevity is determined by oil prices; government expenditure programs, budgetary constraints, effective leadership and efficiency of institutions all influence the market movements. Having said that, the opening up of regional markets and inclusion in international indices does integrate the local markets and makes them sway to global sentiments and capital flows,” he adds.

Bassel Khatoun echoes a similar outlook while stating that the MENA markets could continue to see an integration of local indices within the global equity landscape and expects the accession of Tadawul (Saudi Arabia) to the MSCI Emerging Markets Index as early as 2017. In summary, it is evident that the fortunes of the regional equity markets are far less dependent on crude oil prices, moving in line with the resolve of the Governments at the helm to reduce economic dependency.

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