FT.com / Middle East / Economy - Portfolio shift hits region’s exchanges

They may have limped back a little on Wednesday but there is no disguising that regional stock markets have had a bad year, and a bad May in particular. Nor is the outlook good, analysts say.

The MSCI Barra GCC countries index is down 3 per cent in the year to date, and has fallen a whopping 14.3 per cent in the month to date.

The only consolation is that the wider emerging markets pantheon has fared significantly worse this year.

“It’s been a bloodbath . . . May has been an extremely bad month through and through,” says Mandagolathur Raghu, head of research at Markaz, a Kuwait investment bank.

The culprit behind this week’s turmoil in local markets, analysts say, is the contagion effect of a flight to safety into US dollar assets by international investors concerned by the prospect of prolonged weakness in the eurozone. First it was Greece; now Spain finds itself at the centre of world attention.

As a result, yields on the benchmark 10-year US treasury bonds have tightened significantly and fell to a year-low on Tuesday.

The concern in the Gulf is that prolonged dollar strength in turn is bad for the price of oil. Oil also strengthened on Wednesday, to trade above $70 a barrel following Tuesday’s turmoil but it has fallen from highs of nearly $87 a barrel only last month.

Oil, of course, is the critical determinant of the performance of GCC stock markets and of the economies that underlie them.

“A lot of bearish calls have been made about oil,” says Mr Raghu. “When the dollar continues to strengthen you have this inverse relationship between the dollar and commodities. There is no logic behind this relationship but the dollar moves in the opposite direction to commodities.”

Mr Raghu points to gold, another traditional haven for those caught in a storm, as also indicating that the outlook for commodities generally is not good. Gold prices have risen markedly this year, but they have not picked up as much as anticipated.

Giyas Gokkent, chief economist at National Bank of Abu Dhabi, agrees that there is a portfolio shift going on as investors move out of euro assets and into the dollar and that this impacts on the GCC markets. He says Gulf investors have also been spooked by news emanating from China.

Since mid-April, Beijing has introduced a series of policies designed to cool an overheating property market and to dampen speculation. The fear is that these policies will hit demand for oil.

“China had been the first in terms of recovery – they are very important in terms of incremental demand for oil,” Mr Gokkent says. “Anything that indicates that China might slow down is bad for the oil price.”

Mr Gokkent says local markets may have got ahead of themselves and that the falls seen earlier this week were also a function of over-priced assets.

“I think we are not out of the woods yet. We’ll have to see how this eurozone crisis pans out. I think the key to watch is the euro-dollar relationship,” Mr Gokkent says.