GCC equity markets see minimal impact from global rally in 2017

Key markets close year on a positive note Kuwait records best yearly performance

KUWAIT: Emerging markets equities were the clear outperformers in 2017 as compared to advanced markets and other asset classes and recorded a gain of 34.3 percent during the year. However, this rally had minimal impact on GCC equity markets that closed the year with a mildly positive gain of 0.7 percent for the MSCI GCC Index as regional geopolitical concerns affected international flow of funds as well as domestic investments by local investors in the region. Also, performance of individual markets within the GCC was mixed as some markets gained ground while others declined.

Saudi Arabia, with almost 50 percent of the total GCC market cap, witnessed flattish performance after last quarter recovery pushed yearly performance to +0.2 percent from a yearly low of -6 percent. On the other hand, UAE was one of the worst performing emerging markets during the year as a weak real estate market affected investor sentiments. Kuwait recorded the best yearly performance during 2017 with a return of 11.5 percent for the Kuwait Price Index, while liquidity in Kuwait doubled to $19 billion.

Key markets globally closed the year in the positive zone continuing the trend seen in 2016, although the gains were much larger as compared to the previous year. The MSCI World index recorded a gain of 20.1 percent during the year aided by the emerging market performance. US market witnessed robust performance during the year and closed with a gain of 19.4 percent for the S&P 500 Index after touching the highest recorded level during mid-December.

The overall impact of oil on the direction of the GCC markets was relatively modest as compared to previous years. Oil closed above the $60/b mark, the highest yearly close over the past four years, as supply disruptions from some of the producers is expected to push the oil markets towards a faster rebalancing in 2018 as compared to previous expectations.

The surge in global capital markets gained further momentum in 2017, led by both emerging as well as advanced markets.

Emerging Markets Index recorded the best yearly performance with a gain of 34.3 percent after posting high single digit gains during the previous year. Moreover, despite the modest performance recorded by GCC markets, the MSCI MENA index surged 21 percent during the year primarily on the back of gains recorded by Egypt (+21.7 percent), Tunis (+14.4 percent), Bahrain (+9.1 percent) and Kuwait (+5.6 percent), while the decline recorded by Qatar and UAE partially offset these gains. One of the biggest noticeable positive factor during the year was the 20.1 percent gains recorded by developed market index, highlighting record levels achieved by US and Japan equity indices and more importantly the turnaround of European equities market with gain of almost 9 percent as against flattish performance during the previous year. A number of policy changes announced by the new US government also provided support to market growth. One of key factors that underpinned growth in advanced markets was the improvement in global growth that pushed corporate profits higher coupled with a positive economic outlook that boosted investment activity. Moreover, inflation remained under control that helped drafting of accommodative monetary policies that shaped an expansionary outlook. According to Reuters, large and mid-size constituents from the MSCI World index added more than $8 trillion in market capitalization during 2017. Commodities also had a rally towards the end of the year with Copper futures closing the year with a gain of 30 percent while other base metals recorded similar impressive gains by the end of the year. The run up in oil prices gained momentum in December-17 after a brief cooling period when it emerged that supply from two producers were hit thereby pushing oil prices above the $ 60/b mark and sustaining at these levels for an extended period of time despite shale risks.

For 2018, KAMCO Research believes that global economic growth rate would moderate with almost three more rate hikes expected in 2018 making it costly for corporates to raise additional capital. In addition, the narrowing of yield spreads and cautious stance from investors highlight that good news may have already been factored in the current run up in markets.

After recording gains across the board in 2016, GCC equity markets witnessed mixed performance during 2017. Geopolitical issues hampered the performance of almost all the GCC markets to varying degrees, specifically resulting in a decline of 18.3 percent for the Qatari benchmark while limiting surge in other markets. In addition, the positive effects of rising oil prices was minimal despite oil being the largest contributor to economic growth in the region. The dominance of local retail investors in GCC equity markets also made it highly reactive to regional issues and the current macroeconomic situation, resulting in frequent sell-offs. Nevertheless, a number of positive developments provided support from time to time thereby pulling some markets in the green. The year started on a positive note with Kuwait and Saudi Arabia reaching multi-month highs continuing the momentum seen during late 2016. However, although Kuwait managed to maintain the momentum, Saudi Arabian indices declined to as low as 6 percent during the year on the back of oil price decline and regional issues. The positive sentiments surrounding FTSE qualification of Kuwait and Saudi Arabia also pushed markets higher. Although, Saudi Arabia could not make it to the FTSE Secondary Emerging Market Index as the decision was postponed until March-2018, the gains prior to the actual decision was priced in the benchmark. The decision to include Kuwait in the aforementioned index provided a big boost to the local market and also supported market activity.

Qatar and UAE were the most noticeable decliners in the GCC resulting in these markets being among the worst performers in the global emerging markets. The diplomatic rift with Qatar affected performance of Qatari stocks resulting in the benchmark reaching a lowest point 7,714.3 points or a YTD-17 decline of 26.1 percent. However, the market witnessed a strong pull back during December-17 rising by 10.5 percent with all the listed stocks recording gains during the month. Moreover, the recently released economic data by Qatar points towards an easing of economic difficulties, while GDP growing sharply in Q3-17. On the other hand, the performance of UAE was marred by the Consumer. Staples sector in both Dubai and Abu Dhabi, which witnessed the steepest decline as compared to other sectors led by slide in shares of Marka, DXB Entertainment and Agthia, among the prominent names. The Real Estate sector remained weak due to market sentiment while the Telecom Sector remained the second biggest decliner in the UAE. The Banking sector remained resilient in Dubai with marginal gains but declined slightly in Abu Dhabi.

Trading activity in the GCC declined by a fifth to $303.4 billion as compared to $388 billion during 2016. The decline came primarily on the back of a 28 percent fall in value traded in Saudi Arabia while UAE recorded a decline of 14 percent. Kuwait was the only noticeable market which witnessed a doubling of trading activity in 2017 to reach $ 19 billion.

Kuwait recorded the best yearly performance in the GCC and maintained this position consistently since the start of the year supported by strong buying interest in large-cap stocks. In terms of benchmark performance, the Kuwait Price index recorded a gain of 11.5 percent while Kuwait Weighted and the large-cap Kuwait 15 Index recorded gains of 5.6 percent and 3.4 percent, respectively. The gains during the year were initially led by a long pending rally that started towards the end of last year with the momentum continuing at the start of 2017. This rally was further supported by the enthusiasm surrounding FTSE inclusion that pushed indices to as high as 17.1 percent in September-17, although this was followed by a significant selloff in the market the saw the index reaching the lowest point during the year and was at the brink of falling in the negative zone in terms of YTD performance. Moreover, strong economic fundamentals for the Kuwaiti economy with the lowest break-even oil price in the GCC also provided underlying support to the market during the year.

According to the average of GDP growth rate expectations by IMF and World Bank, Kuwaitís economy is expected to have bottomed in 2017 and is expected to see a strong growth of 3.0 percent in 2018. Regulatory changes announced by the CMA in 2017 also supported liquidity in the market as changes were made to qualify for FTSE upgrade and bringing the exchange more in line with norms in globally advanced exchanges.

In terms of sector performance, the Basic Materials index recorded the highest yearly return of 33.8 percent on the back of gain in shares of three out of four stocks in the sector. The positive performance of companies in this sector was underpinned by improving fundamentals in the oil market resulting in higher net profits.

The Industrials index also surged during the year by 24.3 percent backed by positive performance of large-cap stocks in the sector that include Agility which gained 42.3 percent followed by ALAFCO, Human Soft and Kuwait Cement recording gains of 56.3 percent, 38.5 percent and 14.6 percent, respectively.

The Bank index was the third best performing index in Kuwait with a gain of 12 percent buoyed by double digit gains recorded by bigger banks NBK (+17.6 percent), KFH (+17.3 percent) and Boubyan Bank (+15.9 percent) while the 8.1 percent and 3.3 percent decline in shares of AUB and ABK dragged down performance.

In terms of trading activity, the year witnessed strong indicators since the start of the year. Value traded during the year doubled to KD 5.7 billion ( $19 billion), while volume of shares traded during the year increased by 66 percent to 50.2 billion shares as compared to 30.3 billion shares

in 2016. Zain topped the monthly value chart with a total of 1.22 billion shares traded during the year worth KD 586.9 million. KFH and NBK followed with KD 533.9 million and KD 403.5 million worth of shares traded during the year. Prominent gainers during the year included Alimtiaz Investment with a total return of 63.8 percent followed by ALAFCO and Qurain Petrochemical with gains for 56.2 percent and 47.8 percent, respectively. On the decliners side, Kuwait Food Company (Americana) was among the prominent decliners that recorded a decline of 46.5 percent for 2017.

Tadawul (Saudi Arabia bourse)

The performance of Saudi Arabian market remained volatile during the year given its size as the benchmark traded within a band of +3.9 percent and -6.0 percent and closed the year with an almost flat yearly performance of +0.2 percent. TASIís YTD-17 performance remained in the red for most part of the year and improved only towards the end of the year following gradual reversal of the benchmarkís performance. Rising oil prices towards the end of the year played a crucial role in the reversal as Saudi Arabia made genuine efforts to reduce supply in the oil market by taking a higher share of the agreed upon production cuts that has now been extended till the end of 2018.

Abu Dhabi Securities Exchange

After ending 2016 in the green, the ADX index declined in 2017 by 3.3 percent y-o-y. The index ended the year at 4398.4 points as sectoral performance was more skewed towards decliners in 2017. The best performing sectoral index was the Energy index, which rose by over 32 percent for the year, driven by gains in oil prices. The Insurance index and Industrials index followed with yearly gains of 13.6 percent and 1.2 percent respectively. Consumer Staples names were the worst performing, a trend that was visible in ADXís other UAE counterpart - DFM as well, as the sector declined by 26 percent y-o-y in 2017.

Dubai Financial Market

After closing 2016 as the best performing index, DFM reversed trends and ended 2017 in the red. The DFM Index did remain volatile through the year, and closed the year down by 4.6 percent y-oy. The index closed at 3,370.1 points, and also witnessed declining trends in yearly trading activity, as both volumes and value traded were down for 2017. The volatility in the index was evident in monthly

performance throughout 2017 as well, as monthly advances and declines were evenly distributed. Nevertheless, the index was pushed into the red due to the 7.3 percent drop that occurred from Nov-17 until year-end 2017. Sectoral performance was mixed between gainers and decliners.

Qatar Exchange

Qatar Exchange was the worst performing index in 2017, as regional diplomatic rifts weighed on performance of equity indices. The QE 20 index plunged by 18.3 percent in 2017 and reached 8523.38 points, while the broader All Share Index fell by 14.5 percent for the year. Sectoral performance in 2017 was negative as well, as all indices declined with the Transportation index witnessing the largest drop y-o-y, as the sector declined by 30.6 percent y-o-y. The Insurance and Industrials indices followed with declines of 21.5 percent and 20.8 percent respectively.

Bahrain Bourse

After remaining range bound in 2016, the Bahrain All Share Index was amongst the best performing indices in the GCC in 2017. The index was up 9.1 percent in 2017 and closed at 1331.7 points and was aided by a 3.7 percent gain in the month of Dec-17. The market capitalization as of Dec 17 end was BHD 7.7 billion, moderately up from the previous year, in line with index performance. In terms of sectoral performance in 2017, the Industrials index was able to close the year strong in the green, gaining by 88 percent driven mainly by Aluminum Bahrain, as the stock almost doubled.

Muscat Securities Market

The MSM 30 Index recorded the secondbiggest decline in the GCC during 2017 after all the sectoral indices ended the year in red zone. The index plunged 11.8 percent during the year to reach 5,099.28 points. The Services Index witnessed the steepest decline amongst the three indices at 13.6 percent followed by Industrial Index and the Financial Index with declines of 7.7 percent and 2.6 percent, respectively. Gains during the year were minimal as seen from the peak YTD-17 performance of 1.5 percent, while declines were much deeper at 15.5 percent during mid-August-17 when the benchmark reached a 19-month low level of 4,889.3 points.