Market capitalization hits $904 bn in Q1

Regional

markets like most world equities had a weak start to the year but managed to recover ground by the end of 1Q16. Following a dire end to 2015, GCC equities continued to underperform most international peers with the MSCI GCC total return index retreating 3 percent in 1Q16. Regional markets correlation with oil prices remained high as oil, deficits and economic reforms continued to be key topics for the GCC countries. Total GCC market capitalization stood at $904 billion at end of the quarter, having shed $36 billion during 1Q16.

Internationally, most equity markets kicked off 2016 on shaky footing before recovering some ground later on in 1Q16. Encouraging data from major economies (particularly the US) helped in ending the correction that had hit markets in mid-2015 and continued well into January of 2016. Markets were also supported by further soothing/easing from central banks.

The Fed which had been signaling four hikes (25 bps each) in 2016 is now looking for only two hikes. Meanwhile the European Central Bank (ECB) and the Bank of Japan (BOJ) went ahead with more quantitative easing and/or lowering interest rates (in some cases negative). After retreating more than 10 percent in the first month and a half of 2016 the MSCI World total return index was flat on the quarter. Volatility came off from highs seen in 4Q15 but is still elevated compared to historic levels.

Regionally, markets continue to be driven primarily by oil prices. Oil prices dropped further early on in 2016, reaching 12-year lows before bottoming out towards the end of January. Oil prices are now hovering around the 40$/barrel levels, up 50 percent from their January bottom. GCC equities kept their close tie to oil prices and when the MSCI GCC total return index bottomed on January 21st it had declined 19 percent year to date (ytd). Indeed, oil prices do raise concerns about fiscal sustainability and growth in regional economies.

While GCC governments have expressed their commitment to support growth in the non-oil sector by sticking to their current development spending plans and maintaining large deficits in the medium term, a prolonged period of low oil prices could force governments to reduce capital spending and benefits, and could put pressure on liquidity.

The issuance by the Saudi govern- ment of $28 billion in bonds in 2015 to finance the fiscal deficit served as a reminder of these concerns. Though the first to do so, Saudi is definitely not the exception as all other GCC countries gear up to issue sovereign debt.

GCC equities bounced back together with oil prices towards the end of January. However; performance has since varied among regional peers. Some markets managed to recover all their losses since the start of the year while a few even registered some gains. Dubai was the best performing market and ended the quarter (and ytd) up 6 percent.

Dubai, with a larger foreign investor base, is more susceptible to international factors and markets and thus its rebound was most pronounced, in line with improved international sentiment. Saudi suffered the most from the decline in oil prices and despite recovering most of its losses since the start of the year it underperformed its peers in 1Q16 ending it down by 10 percent.

Bahrain was the second worst performer and retreated 7 percent. Kuwait followed, declining by 6 percent in 1Q16. Even with two acquisitions underway, sentiment remained subdued in a wait-and-see mode.

Market liquidity continues to be low compared to 1Q15. With banks now turning to fixed-income markets to issue Basel III compliant perpetual and other bonds, and sovereigns also turning to capital markets to help finance their deficits, some liquidity is bound to be directed away from equities. Also, with rates now starting to rise in tandem with US rates, fixed-income assets are becoming more attractive.

Regional markets will continue to be impacted primarily by oil prices. Also, economic data from the major economies will affect sentiment as they have important implications for oil prices and the global outlook. Geopolitics and security concerns should also remain key issues for the region, though those may be abating. Meanwhile; GCC markets will continue to follow up on governments’ fiscal and reform plans for the coming years in order to gauge the implications for non-oil growth and business in GCC economies.