After severely underperforming Emerging Market peers in 2009, GCC markets performed more on par with the same in 2010; the S&P GCC index has gained 11% YTD versus about 13% for MSCI EM (MSCI BRIC remains an underperformer with a gain of just 3%). A recent report released by Kuwait Financial Centre “Markaz”, “What to expect in 2011”, points out that there was no perceptible difference in the scale and magnitude of issues that haunted the market post financial crisis. Companies are still busy repairing their balance sheets and image, while governments are busy spending with nothing specific to write home about regarding regulatory reforms.
The report notes that while oil prices did not spring any negative surprise in 2010, it was not enough to propel the market. In the wake of mounting pressures in the form of weak earnings, ultra weak liquidity and ever present volatility, stable oil price alone is not sufficient to lift the markets to heights that investors are used to in the past.
One possible reason for the ultra poor liquidity is that retail investors (constituting the backbone) are still busy putting their house in order while sources of traditional funding for stock market (bank lending) has come to a complete halt. Earnings destruction in certain cyclical sectors like the investment sector has been too severe to stage a meaningful comeback. Even the elephant among the sectors i.e., banking, continued to surprise investors with high levels of provisioning. Given firmer oil prices and a better global economic environment, the GCC is set to show stronger growth going forward despite slower private investment/credit growth continuing to be a drag on economic growth. Private demand is expected to remain weak in the intermediate term until investor confidence returns more fully and bank balance sheets return to a healthier state
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