Stock markets across the world, including those in the region have been greatly affected following the Sept. 11 attacks on the US. Arab stock markets lost between 2 percent and 11 percent of their values in the last three weeks of September, with only the Palestinian stock market rising by 10.1 percent during this period on hopes that the peace process will soon be revived. International stock markets ended the first three quarters down, with the S&P 500 losing 21 percent of its value from the beginning of the year, NASDAQ down 39 percent , Nikkei of Japan down 29 percent and FTSE of the UK ending with a loss of 21 percent.
Global economic slowdown and threatened US reprisals are likely to shed a thicker cloud of uncertainty on the region leaving its impact on oil prices, tourism, shipping, airlines, exports, investments and capital inflows to the Middle East. All the region’s economies and stock markets are likely to be affected, although some will be more resilient than others.
While the rest of the world’s stock markets have been on the decline even before the catastrophic events in the US, the stock markets of Jordan and the Gulf countries were recording strong performances unmatched elsewhere in the world. By Sept. 11, Kuwait’s stock market was up 32 percent, Saudi Arabia’s market by 14 percent, Qatar’s by 20 percent and Jordan’s by 20.9 percent. Bahrain and UAE were also in positive territories, while the rest of the Arab stock markets recorded negative returns.
The Kuwaiti stock market surged on the back of strong oil revenues, improved corporate earnings, lower interest rates and higher liquidity levels. The bearish conditions that prevailed in the last three weeks of September saw share prices drop by 9.8 percent, leaving the market up 18.5 percent on its level at the beginning of the year.
The Saudi stock market witnessed a state of high volatility following the recent attacks in the US. After rising 11.3 percent last year, the Saudi stock market was up 14.4 percent through Sept. 13, before dropping by 10.5 percent in the last three weeks of the third quarter. The index is now only 2.3 percent higher than its level at the beginning of the year.
Other than uncertainties associated with possible US reprisal, the market was reacting to the news of an approaching worldwide recession that would dampen world demand for oil and bring forth lower oil prices. Brent crude dropped last week to $19.8 a barrel, its lowest level in more than two years. The buying spree that emerged in the last few months that preceded the downturn was supported by relatively high oil prices, corporate profitability growth, lower riyal interest rates and positive domestic economic outlook going forward. The fact that the market was opened to foreign investors through mutual funds managed by the domestic banks had more of an impact on sentiment than on reality. The fundamentals of the listed Saudi companies remain strong and we expect the market to regain most of its losses by year end.
Qatar’s market recorded the second best performance after Kuwait among Arab stock markets. It was down by only 2.35 percent in the past three weeks, with the market index up 17.3 percent during the first three quarters of the year. UAE was the only country in the Gulf where share prices rose in the last three weeks of September, with the market index up 4.67 percent from the start of the year. Share prices in Bahrain lost almost 10 percent in the past three weeks, ending the third quarter down 7.45 percent. Oman continues to under perform other Gulf stock markets with the index down 17 percent on its level at the beginning of the year.
Jordan’s stock market ended the third quarter up 16.2 percent, recording the third best performance among Arab countries after Kuwait and Qatar. Most listed companies reported good mid year corporate results and the economy continued to rebound with read GDP growth in the first half of the year of 4.1 percent. The US-Jordan Free Trade Agreement that was finally ratified by the US Senate last week helped the market recoup some of its previous losses. The agreement is expected to boost Jordan’s exports and attract foreign direct investments.
The Palestinian Securities Exchange surged by 10 percent last week following the meeting between Arafat and Peres fueling hopes that the peace process will be revived. This brought the losses since the start of the year to 21 percent, the third worst performance among Arab stock markets after Egypt and Lebanon. While many listed companies in Palestine remain grossly undervalued, the outlook remains very much influenced by political developments that are difficult to predict than by economic fundamentals.
Lebanese stocks are down by 29 percent since the start of the year, reflecting rising worries about internal and regional uncertainties and fears of a financial crisis in a country where public debt exceeds $25 billion and accounts for 160 percent of GDP. Although Lebanon is hoping to attract some nervous Arab capital to its banking sector following the recent developments in the US, the outlook for the stock market remains bearish.
Egyptian stocks have witnessed the steepest drop among Arab stock markets, down 31.9 percent in the first three quarters of the year. The market was undermined by the gradual decline in the Egyptian pound’s exchange rate vis-a-vis the dollar and was particularly sensitive to the slump in global equity markets following the attack on the US. It lost 16 percent of its value in the last three weeks of September. The Casablanca stock exchange which recorded the second best performance among Arab stock markets in the first quarter of 2001 with gains of 4.5 percent, following two year of successive declines, ended the first three quarters of the year down 6.38 percent. Tunisia, which was the region’s star performer last year has entered a correction phase. It is down so far this year by 11.6 percent on the back of heavy losses by a number of blue chip companies.
Slower global economic growth translating into lower oil and commodity prices and rising regional uncertainty will reflect negatively on the local stock markets, as investors get out of the higher risk equities toward more safe and liquid instruments. However, on the positive side, domestic interest rates are likely to trend lower, in tandem with dollar interest rates, boosting domestic liquidity. This will add to the attraction of some blue chip companies who continue to offer relatively high dividend yield. Again we consider the current situation as an opportunity to build long-term positions in equities in selective Arab stock markets based on positive mid year corporate results, especially in the Gulf (other than Oman) and Jordan.
