The escalating US threats against Iraq had a negative impact on the performance of most Arab stock markets in the third quarter this year. The stock markets of the GCC countries and Jordan which enjoyed good performance in the first half of the year retreated in the third quarter. The cloud of uncertainty hovering on the region got thicker with the pending US attack on Iraq, the continued Israeli oppression of the Palestinian people and the dismal performance of the world’s major stock markets.
Among the Group of Seven major industrialized countries, the best performer was Japan whose economy is widely regarded as the most hopeless. The Nikkei index fell only 11.7 percent in the third quarter compared to Germany which was down 36.8 percent, France lost 28.7 percent and Italy was down 22.5 percent. The Dow Jones Industrial Average ended the quarter at a five-year low, while the NASDAQ composite index closed at a six-year low. S&P plunged 17.6 percent during the third quarter, its worst quarterly performance since the stock market crash of October 1987 and ended September down 28 percent from its level at the beginning of the year.
Some repatriation of capital from the US and other major financial markets has been recorded, which helped enhance liquidity and increase trading especially in the GCC stock markets. This together with the prevailing low domestic interest rates, in line with the corresponding dollar rates, and the rise in oil prices to $28 a barrel for Brent crude improved the Gulf countries’ economic outlook and corporate performance. However, the rising fears of an imminent US invasion of Iraq have outweighed the positive developments and brought a downward correction in share prices of these markets.
The Amman Stock Exchange, which posted 7.4 percent gains in the first half of the year, continued its rally in July with the index up 11.7 percent, hitting an all-time high of 193 in the second week of July. The index lost 6.1 percent in the third quarter reduced market gains in the first three quarters of 2002 to just 0.8 percent. Had it not been for developments related to Iraq, Jordan’s stock market would have performed much better. The profitability of listed companies has been on the rise so far this year, particularly for the industrial and pharmaceutical companies. The economy in general has also been doing well, rising by 4.6 percent in the first half of the year and benefiting from improved fiscal management and increased industrial activity.
The Beirut Stock Exchange continued to suffer from low market turnover with losses in stock prices rising from 2.6 percent in the first half to 5.2 percent by the end of the first three quarters of the year. Regional political instability and the huge public debt will continue to weigh on the Lebanese stock market in the months ahead. The Palestine Securities Exchange losses, which reached 12.7 percent at the end of June, increased to 23.4 percent by the end of September. The market remained closed for most of the third quarter and on the rare occasions that trading took place, stock prices suffered heavy losses.
In Egypt, unfavorable regional political developments, weak economy, recurrent pressures on the Egyptian pound and mixed corporate results inhibited active participation by investors. The market ended the third quarter 1.1 percent lower from its level at the beginning of the year. The Casablanca Stock Exchange continued its four-year downward trend, closing the three quarters down 17.6 percent and making the Moroccan bourse the worst performing Arab stock market after the Palestine Securities Exchange. Tunisian stocks managed to improve slightly during the third quarter closing down 5.5 percent from its level at the start of 2002.
The Saudi Arabian stock market which recorded 13.2 percent gains in the first half of 2002, lost almost 4 percent in the third quarter to close the first three quarters up 8.8 percent.
The Bahrain Stock Exchange ended the third quarter down 2.1 percent making it the only GCC stock market to post losses during the first three quarters of the year.
The Kuwaiti Stock Exchange has posted the best performance among Arab stock markets in the first half of the year with gains reaching 30.2 percent. The market rallied on higher liquidity, lower interest rates, firm oil prices and improved economic performance. The stock market was particularly sensitive to planned US war on Iraq. It lost 10.7 percent in the third quarter eroding around half of its mid-year gains and ending Sept. 30 up 16.2 percent.
Unlike other GCC stock markets, UAE and Qatari markets registered positive growth in the third quarter of the year. Qatar recorded the best performance among Arab stock markets so far this year, up 31.7 percent. UAE stocks, which posted 2.6 percent mid-year gains, made headway in the summer with gains reaching 12 percent by early September due mainly to strong corporate performance especially in the banking sector. Fears of war drove the market downward resulting in 5 percent gains by the end of third quarter. The Muscat Securities Market was the second best performing Arab stock market in the first three quarters of the year closing 18.5 percent higher.
The general market fundamentals for Jordan and the GCC countries remain positive, with healthy corporate profitability and strong economic performance. While stock valuations and interest rates are quite low, nevertheless investors may be tempted to book their profits in light of increasing uncertainties in the region, rather than ride out a storm that is widely expected to hit the region in the coming two to three months.
This we believe holds particularly true for Jordan, Kuwait and Saudi Arabia, where performance has already started to show signs of weakening. The stock markets of Qatar, Oman and UAE are likely to remain stable in the fourth quarter despite rising regional tensions. This highlights the fact that the stock markets of the lower Gulf states are not only detached from the global stock markets but also from that of their closest neighbors, and therefore provide good diversification and a defensive channel for investors seeking exposure in the Middle East region.
(Henry T. Azzam is chief executive officer at Jordinvest).
