Global Gulf stocks rally stagnates due to growth concerns

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Investors see limited room for stocks listed in the Gulf Arab states to extend a global rally as oil prices falter and the global economy slows due to tight central bank policies.

The region, dominated by banks and energy companies, has benefited from higher interest rates and oil prices this year, as well as US President Joe Biden’s meeting with Crown Prince Mohammed Bin Salman last month . But investors are now worried about falling oil prices and risks to corporate earnings and global growth amid continued tightening by the Federal Reserve and other major central banks.

The combined MSCI GCC Countries Index rose 7.9% this year after rebounding in July, compared to a 15% drop for the MSCI All-Country World Index. It posted the best month since January, outperforming other developing countries, and is now trading at a 43% premium to the MSCI Emerging Markets Index, nearly three times the average premium over the past 10 years.

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“Investors are still very cautious about how things go from here, as in global markets, corporate earnings have been mixed,” said Faisal Hasan, chief investment officer at Al Mal Capital. “This could lead to a revision of estimates and therefore valuations.”

In US dollar terms, the stock indices of Abu Dhabi, Qatar and Kuwait are among the top 10 performing gauges in the world this year. However, Brent prices are down 22% from their June peak, jeopardizing the recovery.

“Gulf markets benefited from the normalization of U.S.-Saudi relations after Biden’s visit, strong bank earnings performance and oil price stabilization after less hawkish comments from the Fed,” Hasnain said. Malik, strategist at Tellimer in Dubai. Yet “much of the GCC’s resilience in the current global climate is already priced in.”

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Certainly, Gulf stocks still have fans. Morgan Stanley strategists led by Marina Zavolock favor financials in the region, saying they are benefiting from ongoing reforms and Fed rate hikes. They expect the outperformance of Middle Eastern stocks versus emerging markets to continue for reasons including “extraordinary local macro conditions” and strong earnings momentum, according to a July 20 note.

Global equities had their best month since November 2020 in July on bets that weaker economic data will push the Fed to slow the pace of interest rate hikes, but companies like Goldman Sachs Group Inc. and Bank of America Corp. warn that the sale can CV.

“We expect a volatile period in the coming months as global markets gain momentum, especially as a Federal Reserve pivot is not expected in the near term,” Ali El Adou said. head of asset management at Daman Investments.