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04 December 2023

DFM the most insulated from oil curse, says report

By Shashank Shekhar

The Dubai Financial Market (DFM) is the most insulated against high oil prices in the GCC a new report, which attempts to establish a relation between crude and the bourses in the six hydrocarbon-rich GCC states, has noted.

The head of research at Markaz, a Kuwait based investment house who headed the research team, said he has been surprised with results with regards to Oman, a country that has made sustained efforts to diversify its economy.

Markaz said that a linear relationship – "correlation" in terms of a statistician – has developed between oil prices and the stock exchanges of GCC states. While it found the correlation highest in Oman, it found to be the lowest in case of Dubai (51 per cent). DFM's correlation to oil prices increases to 75 per cent when the period is considered from January 2007 onwards, apparently the period when the oil prices rallied.

"There are two important things to note. Firstly, we found a correlation as high as 96 per cent in Oman and 94 per cent in Kuwait. And, secondly, speculations have been very high in the markets when the oil prices were not high," said MR Raghu, the head of research at Markaz.

Raghu blamed "lack of regulations" for the markets to register such highs unsupported by the basic fundamentals. "The problem is that much of the GCC market still remains unregulated."

Interestingly, most of the nationalised oil-producing companies in the GCC are not registered on the regional bourses.

The correlation in the case of stock exchanges of Abu Dhabi, Bahrain and Doha stood at 77 per cent, 87 per cent and 83 per cent respectively, Markaz said.

Oman apparently is the only country to have missed the 2005 boom market bump. "Oman is also missing a 2005 boom market bump, indicating that the Omani market may be less speculative than its neighbours."

The report comes with a rider. Most of the exchanges outpaced the oil prices in mid-2005 and early 2006, a period when oil prices rose 17 per cent.

"The market boom of 2005 was a result of speculative excesses, which were not backed by realistic factors and, as such, constitute an anomaly in our study," Markaz said on the performance of Saudi Arabia Basic Industries Corporation (Sabic) whose price on Tadawul showed a digression with oil prices during the period.

It was during the same period when the two graphs did not correlate in Dubai, Abu Dhabi and in Doha. Between May 2005 and February 2006, when the DFM registered a 109 per cent spike, the oil prices rose just six per cent.

"The market surge in Dubai was not accompanied by a parallel spike in oil prices, which only increased five per cent during the same period. Markaz found similar relationships in Qatar and Abu Dhabi where the stocks rose between 75 and 91 per cent for almost entire 2005 and 2006.

"As such, future oil trends may be helpful in ascertaining which direction stock markets may move in. We foresee subdued oil prices in the next year, giving us a cautious view on the GCC stock markets for 2009," Markaz said.