Sell-off in Gulf stock markets

Stock markets across the Middle East tumbled on Sunday, led by Dubai and Saudi Arabia where the main indexes sank 6.5 percent, as declines on global bourses and falling oil prices sparked a broad sell-off in the region.

Global markets took a big hit on Friday as investors fled to the safety of government bonds after a raft of weak indicators from Europe and China collided with concerns about the U.S. Federal Reserve’s plans to reduce monetary stimulus.

Brent crude oil touched its lowest level since December 2010 at $88.11, though it recovered to $90.21 by the end of Friday trade on short-covering. It has tumbled about $25 since June.

So far, these trends do not spell disaster for Middle Eastern economies or markets. With its current account and state budget surpluses, the Gulf is better equipped to withstand global turbulence than most emerging markets.

Although the Gulf relies on oil exports, governments have built up huge financial reserves that will allow them to continue spending on growth if necessary, while private sectors have been expanding robustly.

A Reuters poll of analysts late last month, when the oil price slide was well underway, found them predicting economic growth in the Gulf would actually rise slightly next year.

Fahd Iqbal, head of Middle East research at Credit Suisse in Dubai, said that historically, there had been no direct correlation between oil prices and stock markets in the Gulf, and only a prolonged slump would begin affecting the region.

Nevertheless, the global turbulence prompted many investors to take some of the big profits which the markets have built up this year. At Sunday’s opening, Dubai was up 47 percent year-to-date and Egypt was up 41 percent.

The pull-back snowballed as some investors started dumping stocks to cut losses and margin calls were made.

Dubai’s index posted its biggest daily percentage decline since August 2013, to 4,620 points. Abu Dhabi’s benchmark, which is usually less volatile, dropped 3.5 percent, its worst day since January 2011.

Some stocks, such as Dubai builder Arabtec and developer Union Properties, fell by their daily limit of 10 percent.

“We might see some more profit-taking in the coming sessions,” said Sebastien Henin, head of asset management at The National Investor in Abu Dhabi.

The Dubai index’s drop below chart support on the September low of 4,808 points triggered a minor double top formed by the September peaks and pointing down to about 4,455 points.

Saudi Arabia’s main index fell to 10,145 points in its biggest daily drop since January 2011, causing the benchmark to close below its 100-day average for the first time since December 2012.

Virtually all liquid stocks declined and, just as in Dubai, some went limit-down, including Al Jazira Bank. Petrochemicals giant Saudi Basic Industries Corp (SABIC) was the main drag, tumbling 7.0 percent.

Shares in Almarai, the Gulf’s largest dairy company, dropped 4.4 percent, even though the company had reported a 13.4 percent increase in third-quarter net profit on Sunday, slightly ahead of analysts’ estimates.

The Saudi market’s slide was magnified by the fact that it, like Kuwait, Qatar and Oman, were closed throughout last week for the Eid al-Adha holiday, so they were reacting on Sunday to an entire week’s worth of deterioration in global sentiment.

Qatar’s benchmark fell 3.0 percent with all stocks in the red, while Egypt dropped 4.1 percent, although a sustained period of lower oil prices could be good news for Egypt’s external and state budget deficits.

“What we’re seeing right now is in part a knee-jerk reaction,” said Iqbal. “The markets have had a good run and some profit-taking was due, but its timing has been driven very much by what’s happening in global markets.”

He added, “I’m bullish on the region over the medium term, therefore I would use the current weakness to accumulate stocks.”

However, with oil prices now very near the levels which Saudi Arabia and the United Arab Emirates need to balance their budgets, government spending growth may slow, which could dampen economic growth somewhat.

“If we see oil prices stabilise and sustain at levels below budget break-even prices, there will pressure on governments to slow down the rate of investment expenditure,” Iqbal said.

“Oil-exporting Gulf countries can easily finance a deficit and there’s good appetite for their debt, but given their more conservative approach in recent years they may prefer to avoid deficit financing, or at the very least minimise it by as much as possible.”-Reuters