The stock markets in the Gulf Co-operation Council (GCC) region continued to exhibit strong growth as all the markets barring Qatar ended April 2005 on a positive note. UAE and Qatar, the two buoyant markets of this year witnessed opposite trends. While the UAE stock market Index reported a whopping monthly gain of 29.23 per cent, the Qatar market saw a steep monthly decline of 15.78 per cent. UAE continues to lead in terms of YTD gains, notching a phenomenal growth of 94.66 per cent in the first 4 months of 2005.

All other GCC markets too reported more than 6 per cent monthly growth, which can be attributed to the positive earning news emanating from the companies. The primary market too is abuzz with IPOs and we are seeing tremendous response in the debutant stocks when they enter the secondary market trading. We believe that the primary market will continue to witness increased attention as a result of positive attitude of the governments and corporates to list their undertakings on the bourses and unlock the value of their investments.

The Road Ahead: Unifying GCC Equity Markets

At the start of May, a meeting was held in Saudi Arabia to discuss the preliminary results of a study undertaken to explore development of the capital markets in the GCC economic bloc. Considered to be the first step toward establishing a joint stock market for GCC countries and a joint bond market, the meeting was arranged to negotiate and exchange opinions and coordinate between the markets to unify the procedures and make the rules and regulations as comparable as possible. The establishment of a single exchange will lead to a number of important benefits for regional financial markets, some of which include a standardisation of trading platforms across exchanges, an increase in market liquidity, a reduction in market fragmentation and a minimization of costs and problems associated with current cross-border trading.

The recent boom in equities across the region has brought about the emergence of an equity oriented culture and has rendered cross-border investment as more common and lucrative. This heightened interest in cross-border listing as well as trading has given markets greater incentive to expand across national boundaries. The consolidation of the markets would give rise to compatible trading platforms, which would eliminate the need for individual markets to invest in high-quality trading systems. Instead, one unified platform would be developed, upgraded and operated.

A unified trading platform would also reduce the cost of cross-border transactions, attracting new investors to the equity markets and generating higher trading volumes. Increasing volumes are important to an exchange because of increased liquidity, which provides opportunity for easy exit in the event of a market downturn. At the same time, the current structure in which the same security is traded on parallel national exchanges contributes to fragmentation of the financial markets and may result in pricing mismatch and opportunity for arbitrage. The creation of a unified exchange resolves this problem as all buy and sell orders could be funneled through a single exchange, thereby concentrating order flows. Greater price stability would result from this concentrated orders flow.

Overall, it is too early to predict the exact structure or timing of this new stock market. Various impediments to consolidation still remain, such as clearing and settlement inefficiencies, regulatory disparities, differences in listing requirements and the existence of individual trading rights to particular stocks in select GCC markets, which are not open for all nationalities. However, we believe moving in the direction of a single market is key for rendering regional markets as a major magnet for international funds, thus improving the region’s visibility on the international investment radar.

Oil Prices – Predictions of ‘Super-Spike’ Period

Recently oil prices broke historic records, NYMEX light crude hit a new record high of US$58.28/b in early April and US$57.65/b in London, led higher by US gasoline and natural gas prices, strong Asian demand and pre-emptive stock building. This was despite OPEC’s decision to raise the output. In March 2005, OPEC met in Iran and decided to raise the organization’s oil production ceiling from 27 million barrels per day to 27.5 million barrels per day with immediate effect should oil prices remain at their current level, or increase further between April 2005 and the next meeting of the organization in Vienna, scheduled for 7 June. This action would be made only after due consultation with other heads of the OPEC delegation. The prices remain in the high territory, however, which is despite an appeal to producers by President Bush to keep prices in check and warnings from Federal Reserve chairman Alan Greenspan that high oil prices could induce 1970s-style conservation.

The OPEC Reference Basket surged to an all-time high of $52.93/b in early April. A recent report by Goldman Sachs had predicted that oil prices were in a “super-spike” period that could see prices reach as high as $105/b over the next few years. However, later during the month the prices have calmed down and went below US$50/b. It is important to mention that, in response to the new market reality of high oil prices, several Asian countries have started to introduce measures to curb demand growth especially in the transportation sector. The Indian and Chinese governments recently increased the price of gasoline and China is likely to raise diesel prices once the harvest season is over. In the same line, Indonesia and Thailand lowered subsidies on transportation fuel and Malaysia is expected to follow suit.

Looking at the demand supply situation, OPEC expects that for the full year, non-OPEC supply is expected to average 50.7 million barrels per day. OPEC Production in March averaged 29.76 million barrels per day, an increase of 300,000 barrels per day from February. OPEC 10 increased by 334,000 barrels per day, while Iraq showed a slight decrease of 34,000 barrels per day. The new supply and demand balance for 2005 shows that world oil demand is now expected to average 84 million barrels per day, while non-OPEC supply and OPEC NGLs and non-conventional oils are expected to average 54.9 million barrels per day. This results in an average difference of 29.1 million barrels per day for 2005.

However, there are concerns that strong global demand for oil could outpace supply as till now even though supply had surged in the face of the clamor for more oil; it was only just keeping pace with demand. A main driver of demand growth has been China and apart from that, the US economy is looking healthier, and demand from developing Asian countries like India is also likely to remain robust. Record high oil prices and record revenues for many Middle Eastern producing countries, supporting solid GDP growth rate point to another solid rise in oil demand in that region. We believe that strong global demand, concerns about limited excess production capacity and fears of unplanned supply disruptions have kept prices high in recent years and this rising trend might affect the economic growth worldwide.

Saudi Stock Market Outlook

During the year 2004, the Saudi market repeated its strong performance as it appreciated by 84.9 per cent on the back of 76.2 per cent growth reported in the previous year, making it one of the top performers in the regional as well as global markets. The market is set on course for another year of strong performance as it reported YTD gains of 37.05 per cent until April 2005. The Saudi market capitalisation, which stood at US$305.9bn at the end of 2004, surged and stood at US$433.4bn at the end of April 2005.

The Saudi market is likely to spearhead the region in terms of the primary market activity. Most of the constraints that IPO markets faced earlier have now been either relaxed or are in the process of being modified, laying the ground for a surge in IPO activities in the years ahead. We believe that in coming times, there will be a growing trend towards converting from limited partnership companies to private shareholding companies. The undercurrent of strong liquidity is likely to evoke strong interest in the upcoming IPOs as we have seen in the past, reaffirming the point that Saudi investors are searching for the quality issues and alternate investment avenues. The financial infrastructure is undergoing a sea change with new regulatory mechanism such as the amended Capital Markets Law coming to the fore.

The corporate earnings of the listed companies have grown at a healthy pace during 2004 and also delivered handsome pay-outs to their shareholders. The net profit of the listed companies increased by more than 45 per cent in 2004 as compared to the previous year. We expect this to continue in 2005 as well. Sector-wise, we expect the banking sector to do well in Saudi Arabia. With the rising interest rates, interest income is expected to remain strong as most of the banks have significant non-interest bearing deposits. Insurance sector is likely to witness strong competition in the wake of government opening up the sector. Utilities sector and energy-related stocks are likely to continue to attract strong investors’ attention.

The announcement of the capital market law, projecting SAGIA (Saudi Arabian General Investment Authority) as the “one-stop-shop” for investing in the kingdom and reforming the tax structure will help a long way in underlining the seriousness of government in inviting private participation in the economic growth which will further strengthen the financial markets. However, we again reiterate that the Saudi market might see correction at some point which is normal in this kind of scenario. Investors should not feel jittery as there is substantial liquidity in the system, earnings outlook is positive and upbeat investors’ sentiments point towards firmness in the Saudi stock market.

Surge in Market Capitalization

The market capitalisation of the GCC region continued to climb with Saudi Arabia’s market capitalisation crossing the US$400bn mark, at US$433.4bn at the end of April 2005 as compared to US$392.99bn in the previous month. UAE market capitalisation too surged ahead to end the month at US$172.3bn. The steep decline in the stock prices in Qatar had its effect on the market capitalisation, which dropped from US$91.1bn in March to US$78.1bn at the end of April 2005. The total volume of shares traded on the GCC bourses in April 05 aggregated to 9.02bn valued at US$106.36bn.

In April 2005, the aggregate market depth remained tilted towards the advancers as 216 stocks advanced and 182 stocks reported a monthly decline. The Qatar market saw across the board selling as it saw only one stock reporting a monthly gain while 29 stocks reported a monthly decline. UAE markets continued to attract buyers’ interests as it reported the highest advance decline ratio of 3.15.