JEDDAH, 17 October 2004 — GCC stock markets continued to surge in September with business confidence and investor sentiments improving day by day. Stocks registered gains in the month in anticipation of another round of excellent results in the upcoming quarter. The economies of the region are headed for another year of healthy growth and positive sentiments have trickled down to the stock markets as can be seen from the momentum in the markets. With the exception of Qatari market, all other market indices registered gains in the month, according to a Kuwait-based Global Investment House report.
UAE headed the region in growth, gaining 6.25 percent in the month. There has been a surge in the volume and value of the shares traded on the bourses indicating strong investor interest in the markets.
Saudi Arabia continued its northward journey, notching 4.8 percent growth during the month. Saudi stock market is also leading in terms of the YTD gain, registering 48.59 percent growth till September 2004.
“Positive economic data and oil prices breaching the psychological $50-mark had their effect and even the increase in the interest rates does not seem to have any dampening effect on investors’ interest in the markets,” the Global report said.
Central banks in the GCC took a cue from the Fed interest rate hike and increased the discount rates/CD rates in their countries. The interest rate hike was almost identical to that of the Fed hike of 25 basis points. In theory, when interest rates go up, there is a reason to believe that asset prices will go down. The higher the interest rates, the better are investments in bonds or fixed income avenues, which compete with investments in other asset classes such as stocks, real estate, etc. Higher interest rates also raise the cost of borrowing to buy these assets, which may diminish demand for them, exerting downward pressure on their prices. However the recent rise in interest rates did not have this predictable effect on the stock prices, which behaved indifferently to the rise in interest rates.
The stock markets of almost all the GCC countries, except Qatar, have grown after the announcement of hike in interest rates in August 2004. The markets in Saudi Arabia and UAE have posted a gain of 4.8 percent and 6.5 percent respectively during September. On the contrary, the level of activity in the markets has also increased with rise in volume and value of shares traded.
Stock markets in the UAE have registered a decent growth both in volume and value of shares traded. Further, a good portion of investors in the GCC have borrowed substantially for the purpose of securities trading and the rising interest rates could shrink the margins, prompting them to pare their holdings. But the markets have witnessed increasing level of activity.
There are strong fundamental reasons to believe this indifferent behavior of the stock markets. The first and foremost among these is strong crude oil prices which will substantially boost oil revenues, the other reasons being substantial credit growth, infrastructure investment, economic liberalization and ample liquidity which fueled the economic growth in almost every sector across the region. Therefore, going forward we believe that the regional stock markets will continue to remain in firm terrain.
Despite some negative rumblings, the Global report said that the GCC markets are on course for another year of strong growth.
There are a number of positive factors which outnumbers the pessimistic overtures, it added. First of all, the oil prices continue to remain at a much higher level throughout the current year thanks to a combination of strong demand, low stock levels, uncertainty over the Russian oil giant Yukos, hurricane damage to Gulf of Mexico supplies, violence near Shell’s Nigerian sites and tensions in Iraq. The report said it is unlikely that the oil prices will go down substantially in the short term which will lead to considerable fiscal surplus for all the GCC economies.
However, this is not to say that the current GCC valuations are driven merely by a strong liquidity in the system. Liquidity is only one of the factors, which has been driving the markets, but important thing is the overall fundamentals and structural changes in the economies which is going to drive the GCC stock markets further.
The Global report said that the GCC companies are witnessing good earnings momentum, which are likely to be sustained on the back of buoyant economy and tremendous business opportunities in the region. Fiscal surplus currently witnessed by the GCC economies due to high oil prices are being invested in infrastructural projects which will further benefit the other sectors of the economy.
The private sector-finance investment boom and privatization efforts are expected to provide further stimulus to GDP growth.
The Global report said that the market capitalization of the GCC region continued to climb and it stood at $420.7 billion as on end of September as compared to the previous month figure of $407.0 billion.
The UAE and Oman saw a surge in terms of value and volume of shares traded on the exchanges. The region as a whole saw 4.55 billion shares changing hands in September as compared to 4.6 billion shares in August.
Advancers continued to outnumber decliners in the GCC markets during September as well. The region as a whole produced 216 advancing stocks, while registering 140 declining ones. However, Qatar market was an exception with more decliners than advancers. The advance-decline ratio was most pronounced in the Saudi market where the ratio was more than 4 stock gaining for every declining stock.