Pricing-in the fundamentals
Are GCC stock markets in tune with each country's economic health? Zawya market analysts Hasan Shahin and Nicolas Zreik explore the correlation.
What are the forces that move the GCC stock markets? Are they reflective of each country's economic health? Do politics, natural disasters, recessions and other factors affect market performance? By exploring these issues, we aim to define the correlation between stock market performance and economic fundamentals and to increase investors' awareness of their asset allocation practices.
In our report, we test the assumption that GCC stock markets "price-in" (which assumes that the price of a stock comprises all of its pertinent data, public or hidden) and therefore progress hand-in-hand with economic fundamentals; we also highlight the major events that may influence our assumed correlation. On a national level, when the correlation between economic fundamentals and stock market performance is low, allocating funds into that country's listed companies is better justified not on the basis of economic fundamentals but by the following criteria: company-specific information, a positive geopolitical environment, announced macro-economic developments, positive market sentiments, and others.
The economic indicators we use in our report are:
Real GDP growth (year-on-year)
Consumer Price Index
Current account as a percentage of GDP
Government gross debt as a percentage of GDP
Gross official reserves as a percentage of GDP
We provide each GCC economy with an Annual Economic Evolution Score (AEES) for the 2006-2010 period, based on the above-mentioned indicators and using our scoring methodology. Moreover, we calculate the annual percentage change of each GCC stock market for the period in question and test the correlation between the change in AEES and stock market performance.
We list all available major news events for each GCC country for the 2006-2010 period, from the BBC News "Timeline" feature. We highlight the events that may have had stronger influences on stock market performance, than economic fundamentals. Finally, we comment on each year's correlation between AEES and stock market performance, emphasizing the possible influence of news events on the latter.
Our report reveals that the stock market that has been the most representative of its country's economic fundamentals between 2006 and 2010 is that of Bahrain, having a correlation of around 85%. Subsequent correlations, in descending order, are: Qatar, Kuwait, UAE, Oman and Saudi Arabia. The only country in this report that resulted in a negative correlation between economic fundamentals and stock market performance was Saudi Arabia. This might be attributed to the fact that it witnessed heightened political activity between 2006 and 2010, relative to its GCC peers, which apparently left deep imprints on its stock market performance.
Our report concludes that stock markets do not always move hand-in-hand with economic fundamentals as news, changes in market sentiments and other factors play a major role. They will influence stock market returns, specifically and investment returns, in general. However, it remains up to investors to judge the power and level of influence of each news development, each economic figure, and other variables. Investors aiming to maximize their returns should develop a creative approach to quantify the impact of events on their investments. We believe that the level of "art" required to invest profitably in the MENA will amplify within the upcoming years.
Zawya Select 2011
