Do oil prices play a key role in influencing the KSE index in the short term?


Markaz study tracks the correlation between oil price and KSE trends since 1994 The finding: Kuwait Stock Index and Oil –The Inseparable Twins In its recent study, Markaz tracks the correlation between oil prices and the KSE index during the past fifteen years (1994 – 2008). The study revealed that they are positively correlated. The correlation of oil price and KSE price index is a staggering 94%. The report traced the history of the Kuwait stock index during the last 15 years, and identified three phases, where oil price has played a very direct and key role in the performance of the stock market:  A stagnant phase (1994-2000): Where oil price increased by 81% while the stock market appreciated by 35%, A bull phase (2000-2007): Where oil price increased by 255% and the stock market appreciated by a whopping 839%,  A bear phase (2008): Where oil price decreased by 49% and the stock market decreased by 30%. In a nutshell, oil plays a vital role in the economy and, therefore, the stock market. The relationship between oil and the stock market can be very clearly observed in the following chart that provides the link from 1994. The chart also reflects some key events in the same period:

  • August 1994 - Privatization started
  • April 1996 - first annual installment of debt repayment schedule passed; 77% of the obligations repaid
  • H1 1997 - Saw average market price of shares rise by 30% on the back of strong corporate earnings, excess liquidity, and privatization policy launch by Kuwait Investment Authority
  • 1998 - High budgetary deficit and lack of reforms coupled with Asian crisis
  • November 1999 – KSE index hits lowest level since 1996
  • H2 2000 - Kuwait's Parliament passed a law allowing foreign investors (outside GCC) to invest in KSE
  • March 2001 - The National Assembly passed a direct foreign investment bill that authorizes majority foreign-ownership in new investment projects (up to 100 %) in selected sectors.
  • H2 2001 - Announcement of five-year privatization program aimed at gas station outlets, post office, telegraph, telecom services, port authority and public transport.
  • H2 2002 - KSE index loses due to Iraq/US war.
  • H1 2003 - Low interest rates and excess liquidity in the banking system assisted the flow of investments into the Kuwaiti stock and real estate markets.
  • February 2004 - US and Kuwait sign bilateral free trade agreement.
  • March 2005 - Stocks rose on bullish sentiments prevailing in the market, favorable economic news and consistently positive corporate news.
  • H2 2005 - KSE breaches 10,000 -pts due to low inflation (2.3%) plus high liquidity.
  • March 2006 - Stocks slid amid a record number of planned IPOs and concern that stock prices outpaced the outlook for earnings growth
  • H2 2006 - Market fell due to legal & business issues with companies like AGLTY, National Real Estate Co.
  • Q4 2007 - Law passed abolishing capital gains tax (55%) for foreigners investing in KSE and reducing foreign corporate tax to 15% from 55%
  • July 2008 - Oil prices reach their life-time high of $147/bbl leading to a surge in the stock market
  • November 2008 - Fall in oil price reached 61%, in addition to foreign investment institution redemption pressure, concerns about corporate earnings results as well future earnings, and worsening global financial crisis
  • November 2008 - Stocks lost on fears over the future of Kuwaiti investment companies. Investment companies have asked for a government bail-out to help pay part of their estimated $22Bn debt
  • 13 November 2008 - Trading on KSE was halted by court order in an effort to protect small investors. • 18. November 2008 - Gulf Bank declared a loss of KD375 Mn ($1.4 Bn) on derivatives deals. Gulf Bank shares remain suspended from trading for nearly eight consecutive weeks.
  • 17 November 2008 - Kuwait Stock Exchange resumed trading. By using statistical tools, one can study this relationship in order to forecast the stock index at any given level of oil price. Here we produce some estimates based on this relationship between oil and the Kuwait stock index.

Oil Price KSE Index (Expected)* Deviation from current index 20 1,845 -6,919 30 3,381 -5,382 40 4,918 -3,846 50 6,454 -2,310 60 7,990 -774 70 9,526 762 80 11,062 2,299 90 12,599 3,835 100 14,135 5,371 *Based on regression analysis The above table shows that at $50/b oil price, the Kuwait stock index is still overvalued by nearly 2,300 points. However, if the price of oil were to reach, say $70/b then the expected level for the index shoots up to 9,526 giving an upside of 6% from the current index level of 8,958. If oil prices reach $100/b, then the upside from the current level can be a staggering 58%. However, also brace yourself for a lower price scenario. If oil price drops to say $30/b, then the downside is nearly 62%. So it all boils down to your forecast on oil price. ###

About Markaz Kuwait Financial Centre 'Markaz', with total assets under management of over KD1.2 billion as of September 30, 2008, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region.

 Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997; and was awarded a BBB+ corporate rating by Capital Intelligence Ltd.