The Middle East’s Reshuffled Index Deck
Middle East stock markets outperformed Asian and other regional rivals on the MSCI Index through the third quarter, as Gulf hydrocarbons exporters in particular benefited from rising prices and graduation and entry moves across benchmark equity and debt gauges. Following the recent elevation of Qatar and the United Arab Emirates from MSCI’s frontier to core roster, Saudi Arabia as the Gulf’s biggest market with $500 billion capitalization will repeat the pattern next year. Those three along with Bahrain and Kuwait will also soon enter JP Morgan’s EMBI sovereign bond index after issuing $125 billion combined the past two years, at an estimated 10-15% weighting.
Fund managers increased exposure ahead of the changes to support double-digit gains, and Egypt and Tunisia were embraced respectively for good marks on its International Monetary Fund program and a 40% frontier index-leading advance. However the rejiggering did not alter underlying dynamics of lackluster 3% average gross domestic product growth by the IMF’s latest forecast, and longer-term equity market losses, often attributed to the lack of private sector competiveness and economic diversification. A World Bank report published over the summer highlighted the Arab world’s absence of a venture capital and business startup “ecosystem,” and urged thorough public and corporate governance overhauls even with favorable short-term investor positioning.
Saudi Arabia, which will join the MSCI top tier in May 2019, was a main focus as analysts unraveled the contradictory implications of Crown Prince Mohammed bin Salman’s future reform vision, indefinite delay of the Aramco international IPO with a shift to state petrochemical giant stake buyout, and diplomatic spats before the disappearance and alleged murder of a prominent journalist in Turkey, most notably in the cutoff of commercial and cultural ties with Canada over criticism of a women’s rights activist’s detention. MBS has plowed $45 billion into a tech fund run by Japan’s Softbank, and announced a bet ten times that size on a state of the art new Red Sea city during his global investor forum debut a year ago. Reportedly he was at the top of the acquirer list as electric car entrepreneur Elon Musk considered New York Stock exchange delisting. In the Gulf Cooperation Council, he spearheaded the blockade to isolate Qatar for presumed Iran sympathies, as the 15% equity market jump there through September were identical. The fragmentation has hurt GCC corporate earnings barely increasing at a 10% annual pace, and disrupted banking ties as exposure from the neighboring Turkey crisis worsens.
GDP growth will only be in the 2.5% range through next year despite oil price rebound to $80/ barrel, on subdued construction from cancelled infrastructure projects and new taxes and subsidy cuts eroding consumption. Spending rose under revised fiscal targets which still project a 3% deficit, while the current account surplus will reach 10% of GDP as reserves improve to $525 billion. The $250 billion Public Investment Fund, the sovereign wealth vehicle where the Crown Prince seeks to boost assets to $400 billion by end-decade, did not completely draw on its holdings but instead borrowed $10 billion from an international bank syndicate so Aramco, rather than pursuing its landmark flotation, could purchase $70 billion ownership in the Sabic chemical group. Government officials, after touting an IPO in world financial centers, may have balked at rigorous disclosure despite hints in Hong Kong and elsewhere that rules could be adjusted.
Egypt was essentially flat as the top core index regional component through the third quarter, and Saudi Arabia and the UAE represent one-tenth of foreign direct investment and the overwhelming remittances source, which along with tourism doubled the services surplus to $10 billion, according to the latest figures. Exports from the new Zohr gas field should shrink the 2.5% of GDP current account gap. For the 2018-19 fiscal year growth is forecast at 5.5%, but inflation is almost 15% after another round of fuel subsidy cuts at IMF instigation. The central bank maintained an 18% policy rate which originally prompted $20 billion overseas allocation into local Treasury bills, but the amount fell $5 billion in August as President Abdel Fattah al-Sisi further cracked down on military, media and former regime opponents. Ex-President Hosni Mubarak’s sons were arrested for previous stock manipulation to underscore current enthusiasm risks with their own hint of orchestration.
