Download Summary The Gulf cooperation council was formed in 1981, and it

Summary
The Gulf cooperation council was formed in 1981, and it included Middle
Eastern countries that were mostly found in the gulf region but not all of them, since
Yemen is not included here. The stock exchange in this region that is termed as the
GCC has seen an improvement in its performance in the past ten years. Even after the
global recession hit, the GCC stock market was not adversely affected, as we saw in
other areas such as the US.
Saudi Arabia, which is one of the largest economies in the GCC, showed an
increased market capitalization to gross domestic product ratio that was almost
measurable to those of developed and stable economies. These markets are also
dependent on oil; however common macro-economic factors such as the US Treasury
bill rates have been found to affect the performance of the market. This is because the
GCC countries’ currencies are in one way or the other linked to the US dollar.
Liquidity and decline in interest rates are also known to affect the performance of the
GCC stock market, as well.
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Introduction
The Gulf cooperation council includes countries in the gulf region that deal
with petroleum. These countries include – the United Arab Emirates, Bahrain, Oman,
Qatar and Saudi Arabia. Over the past couple of years, the GCC stock market has
grown tremendously in terms of market capitalization and trading turnover. Investor
interest in the GCC stock market has also increased significantly, and this is seen in
the GCC market indices. Over the ten years, the gulf cooperation council stock market
has been significantly influenced by three main factors. These factors are the high oil
prices, abundant levels of liquidity in the region and the decline in the interest rates.
GCC countries have over the past ten years taken steps towards developing
their capital markets; this has seen most of them develop new regulations to facilitate
this growth. Over time, these regulations have been able to strengthen the
transparency of these stock markets thus increasing their efficiency. The ripple effect
of this healthy economy among the GCC countries is that, the number of listed
companies in the stock market of each individual country, has increased. These stock
markets have individual life lines and trends. This is illustrated by the difference in
their performance since the year 2000. The difference in their performance is
attributed by their varied sensitivity to international prices such as the prices of basic
commodities and the rate of international investments in the individual countries.
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Influence of oil prices on the GCC stock market performance
From the year 2002, the oil prices have been increasing rapidly, and this as
changed the economies of oil producing countries more so the ones in the Middle East
like UAE, Bahrain, Kuwait and Saudi Arabia which are also a part of the gulf
cooperation council. The performance of the GCC stock market is both strong and
different, and the high oil price is one of the factors that have led to this. Oil is a
major motivator for the trends and indices on the GCC stock market since the GCC
countries are major suppliers of oil in the world energy market, and all these countries
collectively possess forty seven percent of the world’s proven oil reserves (Dr.
Hakim, pg. 1-7). It is a well-known fact that oil revenues are major components of
aggregate demand in these countries. This aggregate demand is what influences
corporate activities, such as investments, as well as influencing the domestic price
levels of basic commodities, which in turn affect the corporate earnings and trend that
the stock prices would take.
As much as most of the GCC countries have tried to diversify their economies,
they are still highly dependent on oil. This has seen countries such as Saudi Arabia
witness an economic boom since the year 2006 as other parts of the world were on
recession.
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Abundant Liquidity and its influence on GCC stock market performance
Diversification of the economies has not been overly successful in the GCC
countries. This limited diversity and the excess liquidity like easy availability and
accessibility of liquid cash has favored the increase in the stock market that, has led to
the markets experiencing a lot of activities. Dr. Hakim estimated that the domestic
liquidity of Kuwait, Saudi Arabia, Bahrain and Oman from the year 2002-2005
increased by 50 %, 65 %, 50 %., and 36 % respectively. This is attributed to the rapid
demand for credit and the improved access for finances for corporations, facilitating
the strong growth in investments that has led to the upward surge of the stock market.
This excess liquidity has led to the increased supply of money in the economy that,
has led to the increased number of listed companies in the GCC stock markets, in all
the countries that are involved, because of the need for investors to create more
wealth. The economic boom in these countries that are dependent on petroleum for
the countries’ revenue have also seen an improved performance in the stock markets.
The increased money supply that has been coupled by the strengthening of the
currencies of these countries namely; the Riyal and the Dinah, against major
currencies, such as the dollar and the pound, has also influenced the significant
development of the stock market in GCC countries over the past ten years.
The liquidity of the three largest economies among the GCC countries that is –
Saudi Arabia, United Arab Emirates and Kuwait, has shown the positive correlation
between the importance of oil, and the prices of the stocks in the market.
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Influence of declined interest rates on stock performance
The decreased interest rates in the stock markets of GCC countries have been
attributed to the sensitivity of the GCC to the US Treasury bill rates. These are I turn
affected by the economic positioning of the country whether it is experiencing a boom
or a recession. The GCC countries are, however, not overly affected by the
international prices of other stock markets and their performance. The only reason
that it is affected by the US Treasury bill rates is because these countries fixed their
currencies to the United States dollar years prior. As a result of this, the GCC stock
market became sensitive to global factors, such as the mentioned US Treasury bill
rates and the oil prices that they have to adhere to. Most of these countries had their
national currencies fixed to the US dollar either directly on a one to one basis or
through a basket of currencies hat were dominated by the dollar.
For Saudi Arabia, as much as the number of companies that are listed in the
stock market are slightly over eighty which is not such a big number compared to
other developed countries, it has still taken off vigorously due to the fast developing
of the capital market. This market is seen to be relatively expensive. The amounts of
shares that have traded yearly since the year 2002 have seen a steady rise for the past
ten years. The value of these stocks has also increased over the same period. The
reason for this, has been attributed to the increase in investor awareness, and
regulations that were formulated that made the investment into the stock market
easier, and more conducive even for foreign investors. The share prices in the Saudi
market started to decrease from the second quarter of the 2006 financial year;
however, this did not have a significant influence on the real economy of the country.
As of November 2008, the GCC market saw the worst performance since its
inception. It dropped by $127 billion which was the lowest that it had ever got to in
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the previous four years (Sambidge). This decline in the stock market was observed
through the remaining part of 2006 to the early part of 2007 when it managed to
stabilize substantially. This short term diversion in the stock market, did not serve to
make the investors panic, but rather they held their ground since, they observed that
the downward trend did not spill over into the non-financial market, which meant that
the probability of recovery were higher. The fact that, most of the investors in the
market were strategic investors who were not fazed by the momentary fluctuation in
the market, was also an added advantage that made the GCC stock market stay afloat
until it stabilized.
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The GCC Stock Market
Most of the stock markets in GCC countries experienced an increase in the
rate of market capitalization to gross domestic product of the country in question
which when compared to those of other developed countries, such as the United
Kingdom and the United States, they measured favorably. After the 2006 down turn,
the market especially for Saudi Arabia and UAE stabilized as from mid-2007 and the
trend was maintained through the recession. As a matter of fact, the market has seen
been able to recover. This recovery has, however, been affected by the growing
political and social unrest in the region. The GCC stock market has not been affected
greatly by this unrest; however the Bahrain stock market has not been able to have the
same positive trend as the other countries.
Ratio of Stock Market Capitalization as % of GDP
2000
2001
2002
2003
2004
2005
2006
2007
Kuwait
53.46
78.07
98.64
127.95
124.20
158.6
104.8
106.2
Bahrain
82.81
83.96
88.86
100.10
121.65
130.04
134.17
150.5
Oman
25.48
22.57
25.62
33.52
37.55
49.79
44.8
65.8
Saudi
36.09
40.07
39.72
73.31
122.39
210.04
93.6
136
UAE
31.09
40.16
51.85
55.82
91.69
132.53
65.8
129
Qatar
29.28
42.64
53.18
113.47
127.32
205.13
115
134.5
Source: Gulf Investment Company (GIC),
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250
200
Kuwait
Bahrain
150
Oman
Saudi
100
UAE
Qatar
50
0
2000
2001
2002
2003
2004
2005
2006
2007
The stock markets in the GCC countries, just like those in other counties, has
seen the stocks in the market fall tremendously and with the political and social unrest
in the middle east, the fall has been even more pronounced in some of the GCC
economies. These recent price falls have led to the overselling of stocks in the GCC
market. The year 2012 as been especially trying for this market, the performance of
the GCC stock market has been below average. Saudi Arabia and Kuwait have been
among the worst hit, and their markets have seen a fall of up to 5 % each (Sbeiti &
Alshamari). This is a significant fall in performance.
Bahrain, whose stock market has been performing badly over the past year it
only experienced a 1.25 % fall in its stock index. This situation in Bahrain is bound to
deteriorate since there is a complete lack of liquidity in stock this means that many
stocks in this market did not trade at all.
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Conclusion
The GCC stock market saw an upward trend in its performance from the year
2002 to the year 2006. In the mid-2006, the performance of most of the markets that
are GCC countries experienced a decline in the performance; however the market
started to improve in the mid-2007 and the trend stabilized for the better part of the
next three and a half years when the recession hit and this affected the market
performance with Bahrain being the worst hit. The political and social unrest in the
Middle East also did not help the situation much, and in 2012, the stock market
indices for these GCC countries, fell tremendously.
The performance of the GCC stock market has been influenced by three major
factors since, its inception in 1981. These factors include: the oil prices. The GCC
countries are mostly dependent on oil for their revenues thus the oil prices affect the
stock prices and thus the stock performance. Liquidity of the countries also influences
the performance of the stock market. The increased liquidity leads to the increase in
the number of investors and investments in the stock markets that increased the stock
indices. The third factor influencing the stock performance s the decreased interest
rates in the market that were influenced by the US Treasury bill rates.
A lot of researches have been decided to The GCC Stock Market and its performance.
They are need for covering several aspects of the market like short run and long run
between GCC Stock and macrocosmic variables because; the gulf economy is
growing fast as well the economic of the global changes such as Euro-one’s possible
disintegration.
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Recommendations
The Middle East world is sustained from the oil revenue. This revenue
supports the stock exchange for all the regional countries. Oil as a commodity is
traded by the use of a dollar, this suppresses the involved countries currencies. The
regions ought to introduce a common currency for the trade of the lucrative
commodity. This will maximize the profits from the oil yields, in addition, the oil
related products has to be introduced into the stock market. This will be a means of
expanding investment and shifting the focus of the oil industry in the local and
international fund.
In other hand، there is an issue, which needs to be studied such as transparency, and
disclosure GCC stock market volatility was partly attributed to lack of transparency
and information inadequacy because they are actually major cause of the factors
preventing the efficient transformation of market signals.
Moreover, a study should be done on this issue regaining truest among the GCC
investors and possible appetizers that can attract the specially for the fact that the
GCC stock market is dominated by the retail investors
Lack of information leads to minimize the liquidity and enough information gives
better result and high growth of investment so investor can evaluate on the right way.
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