In spite of all this, the S&P 500 stayed put and did not budge down. However, emerging markets and GCC (Gulf Cooperation Council) cracked under pressure and ended up in the red. In spite of reasonably strong oil price and stable economies, GCC stock markets decided to dance more to the tune of global events than regional ones, breaking the traditional correlation between oil price and stock market performance, according to a report by Kuwait Financial Centre (Markaz).
Stable earnings and attractive valuations did not encourage much of foreign investment interest who viewed the Arab Spring with trepidation. Consequently, liquidity dried up in certain markets rather severely mainly due to lack of bank lending, lack of market depth and lack of institutional investors.
Regardless of the stock market performance, governments in the region are busy investing in infrastructure.
“If bank lending resumes its normal rate, we will see bright spots returning once again. Governments can do well by introducing long pending capital market reforms, improving corporate governance/transparency and opening up foreign investment limits to broad base ownership and help elevate some markets to MSCI Emerging Market status,” the Markaz report said.
“For 2012, we have adopted a Neutral view of the markets due mainly to lackluster market liquidity and activity which is overshadowing more positive indicators on the economy and earnings. We are Positive on Saudi Arabia and Qatar due to positive economic growth prospects, earnings potential and market liquidity,” Markaz said in its report.
The overall GCC markets as measured by the S&P GCC Composite index lost 8 percent in 2011 after gaining 13 percent in 2010; this is a significant outperformance of MSCI EM, which was down 21 percent, and the MSCI World Index, which lost 10 percent.
However, GCC markets were down for the year; the largest decline was in Bahrain which lost 20 percent given the high degree of political unrest and resultant economic ramifications followed by Dubai with a loss of 17 percent. The best performance was in Qatar, which managed to stay in the green with a 1 percent gain.
Throughout 2011 Markaz was Neutral on Saudi Arabia.
Going into 2011, it was Positive on Kuwait due to positive regulatory developments, a large-scale development plan going into effect and high economic growth prospects. This view was subsequently downgraded to Neutral as market conditions worsened, exacerbated by ambiguities regarding the new Capital Market Authority and its bylaws and regulations. Regional political unrest also played a part in turning market sentiment negative in addition to poor corporate news.
Markaz maintained a mixed view on the UAE throughout the year; Positive on Abu Dhabi while Neutral on Dubai. Downside risk remained centered mainly on Dubai's debt restructuring process with concerns arising that the emirate might need further financial support in the coming year.
It was Positive on Qatar for the third consecutive year due to continued high economic growth fueled by high capital and infrastructure spending by the government, positive regulatory developments across a number of pivotal sectors, healthy corporate earnings growth and increasing market liquidity.
Its view on Oman went from Positive to Neutral by the middle of 2011 on account of negative impact from political unrest and the resultant strain on government finances and corporates.
Markaz maintained a Neutral view on Bahrain (although it verged on Negative) due to economic forecasts which are holding up through the year and neutral earnings growth. Negatives were based on low market liquidity and geopolitical risks which dented investor sentiment, particularly across the region has played a following Moody's downgrade of the country's sovereign credit rating to large part in the declining Baa1 (from A3) with a Negative outlook in May.
Value traded across the GCC region has been on a downward trend since peaking at over $1.6 trillion in 2006, experiencing annual declines of 40 percent in 2007, 2009 and 2010 each. Liquidity hit a low of $296 billion in 2010 and reached $335 billion in 2011, the first annual increase since 2006.
The decline in liquidity has been caused by several factors, most of which stem from the global credit crisis in 2008 and its repercussions. Moreover, the drying up of market liquidity has had many adverse effects on exchanges and the asset management industry as a whole.
The relative halting of lending across the region has played a large part in the declining liquidity on the exchanges. According to the Institute of International Finance, around 10 percent of bank lending goes toward the purchasing of securities while 26 percent and 10 percent goes toward real estate and investment companies, which are currently in a state of distress or low growth potential.
Consequently, loan growth across the GCC has decelerated sharply since 2009. The average annual growth in loans between 2004-2008 was 29 percent, reaching a high of 38 percent in 2007. This rate has fallen to low single digits in the past two years; coming in at a flat 1 percent in 2009 and 6 percent in 2010. “Based on the trend in the first nine months of 2011, we would expect growth to be at about 7 percent in 2011 before increasing slightly to 8.6 percent in 2012,” Markaz said.
Loan growth has slowed due to a variety of reasons, chief among them being a heightened risk aversion among GCC banks as they work toward restoring health to their balance sheets and moving away from so-called "name lending".
It is well known that oil revenues, and by default oil prices, are what drive GCC economies, despite efforts by individual states to diversify their economies. Hydrocarbon GDP continues to dominate the region and consequently, periods of high oil prices - and consequently high economic growth - has fed into the stock market through increased liquidity and petrodollars. However, this relationship seems to be breaking, with oil price no longer driving stock market performance.
From 2005 to date, crude oil and the S&P GCC Index have had a correlation of 39 percent, increasing to 44 percent between 2005-2008. If we analyze the period following the start of the crisis, i.e. 2009 to date, the correlation drops to 22 percent as markets traded sideways while crude oil went on the rise. Correlation dipped into negative territory in 2011 as political unrest in the region brought markets down while uncertainty and supply concerns from Libya caused oil prices to surge.
There are not many options when it comes to investing in the GCC region; most funds and portfolios deal with plain "vanilla" products like mutual and sector-specific funds. Fixed Income is only now gaining popularity as an investment opportunity, but even then, most investments are held to maturity and little-to-no secondary trading is available on these products.
Abu Dhabi and Saudi Arabia both started ETF trading on their exchanges in early 2010, though these had had little liquidity. A total of SR25 million ($6.6 million) has been traded on the Tadawul ETF market from August to December of 2011; however, the trading is showing an increasing trend month on month, reaching SR9 million in December.
The overall economic scenario is positive for all GCC nations except Bahrain which continues to suffer the economic effects of political unrest.
Real GDP across the GCC is expected to show a growth of about 6.7 percent in 2011 to moderate to a rate of 4 percent in 2012. Growth in Saudi Arabia is expected at 6.5 percent in 2011 due to high oil revenues as the Kingdom ramped up production to compensate for lost Libyan production. This is expected to come down by about half in 2012 as the situation stabilizes in Libya while oil demand on a whole is slated to come down as the world economy slows.
Kuwait GDP growth was up as well on account of higher oil revenues, estimated at a rate of 5.7 percent in 2011, but is expected to come down by around 1 percent in 2012. Qatar, the world's highest growth economy over the last few years, is expected to have grown around 19 percent in 2011, but the rate is expected to drop to high single-digit growth in 2012.
Both Saudi Arabia and Kuwait saw jumps in inflation during 2011 due to government grants and subsidies. Saudi inflation is expected to remain in the 5 percent range in 2012 due to continued high rent and food prices which make up a combined 46 percent of the CPI basket. Kuwait's inflation is expected to come down by half in 2012 to about 3.4 percent while Qatar inflation is expected to double.
Fiscal Balances expanded throughout 2011, mainly due to high oil revenues from the beginning of the year; however, they are expected to tighten in 2012 as government spending increases while a slowdown in global economic conditions reduces oil prices and, subsequently, government revenues.
Kuwait is expected to maintain the highest fiscal balance as a percent of GDP at 13 percent for 2012, about half that of 2011, while Saudi Arabia, Qatar and the UAE are expected to show balances of around 3 percent of GDP.
According to the IIF, the consolidated current account balance of the GCC is estimated to top $285 billion in 2011 (from $150 billion in 2010) on account of a positive commodities environment, epitomized by the oil spikes during the year and increased production out of Saudi Arabia. This is expected to come down slightly to $213 billion in 2012.
As a percent of GDP, Kuwait continues to maintain the highest ratio, at 36 percent in 2011 to come down to about 30 percent in 2012 while Saudi Arabia would see its Current Account Balance fall from 24 percent of GDP in 2011 to 16% in 2012.
Money supply (M2) growth was down sharply in 2010 across most GCC countries except Qatar where growth came in at 23 percent, i.e. on par with its 2003-2009 average. There was a slight pickup in M2 growth in 2011, but not significantly. Saudi, Oman and Kuwait registered 12 percent, 9 percent and 10 percent growth rates, respectively, while M2 growth in Qatar surged to 27 percent. Notably, the UAE saw M2 growth decelerate to 4 percent.
Normalizing earnings growth coupled with poor market performance continues to stretch valuations. GCC corporate earnings came in at $41 billion in the first nine months of 2011, an 11 percent growth.
Going forward into 2012, we expect corporate earnings to top $64 billion, a 19 percent annual growth. Dividend yields are expected to come up across the GCC as earnings return to health, except in Oman where the yield is expected to fall from 5.1 percent to 4.8 percent in 2011.
In last August report, Markaz expected to see an overall growth of 15 percent in GCC corporate earnings in 2011, using an adjusted average of quarterly numbers to arrive at a full year estimate.
However, second and third quarter earnings have been healthy for GCC corporates despite the challenges brought on by political unrest, the European crisis and local/regional corporate and regulatory issues.
Figures for the first nine months of 2011 show a growth of 11 percent to $41 billion.
Earnings growth has been strongest in Saudi Arabia, growing at 24 percent to $19.7 billion while Oman saw the weakest results at a decline of 26 percent. Kuwait also showed negative earnings growth at –21 percent.
“We expect earnings growth to continue a steady growth in 2012, topping $64 billion, which would bring it back to the levels reached in 2007 prior to the on-set of the global crises with the UAE set to grow at 23 percent while Saudi Arabia and Kuwait are forecasted to show an earnings growth of around 19 percent each.
Markaz maintains a positive outlook on Saudi Arabia for 2012. The 2012 budget is expected to show a surplus of just $3 billion due to lower revenue and spending in the coming year.
Housing property prices are expected to rise in 2012 as the Kingdom continues to grapple with residential real estate shortages for its growing population.
