Zawya, the leading online provider of business intelligence on the Middle East and North Africa (MENA) region, released a report titled: ‘GCC Stock Markets: Unearthing the Drivers of Fluctuation’. The report aims to define the correlation between stock market performance and economic fundamentals, as well as increasing investors’ awareness of their asset allocation practices. Furthermore, Zawya has created an Annual Economic Evolution score for each GCC economy which will be updated on an annual basis.
Zawya’s ‘GCC Stock Markets’ report; by Senior Market Analyst Hasan Shahin, and Market Analyst Nicolas Zreik, tests the assumption that the GCC stock markets “price in” and therefore progress hand in hand with economic fundamentals. Furthermore, the report highlights the major events that may influence the assumed correlation.
Zawya has calculated an Annual Economic Evolution Score (AEES) for each GCC country between 2006 -2010, based on Zawya’s scoring methods and five economic indicators; Real GDP Growth (Year on Year), Consumer Price Index, Current Account as a percentage of GDP, Total Government Gross Debt as a percentage of GDP and Gross Official Reserves as a percentage of GDP. Zawya calculates the correlation between the change in AEES’s and stock market performance. The higher the correlation is; the more representative a stock market is of its country’s economic fundamentals.
Generally, 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 report used the BBC News ‘Timeline’ feature to highlight the events that may have had stronger influences on the stock market’s performance than economic fundamentals. Hasan Shahin, Senior Market Analyst, Zawya said: “It was shown that 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 approximately 85%. Subsequent correlations, in descending order, are: Qatar, Kuwait, UAE, Oman and Saudi Arabia.”
The report mainly highlights that stock markets do not always move hand-in-hand with economic fundamentals as news, changes in market sentiments and numerous other factors play a major role. Shahin commented further: “Zawya highlights the fact that investors aiming to maximize their returns should develop a creative approach to quantify the impact of events on their investments, especially within the current turbulent political events.”