Markaz: GCC markets recover in July in line with global markets; Oil decline by 4.2%


Kuwait Financial Centre “Markaz” recently released its Monthly Market Review report for the month of July 2022. Kuwait’s All Share Index marked a sharp recovery in July after last month’s loss, rising by 4.2%. Last week of July witnessed another 75 bps interest rate hike by the U.S. Federal Reserve, which was followed by hikes across various GCC countries. Oil prices declined by 4.2% for the month with downwards pressure on demand amid COVID-19 restrictions in China and strengthening the U.S. Dollar.

Among sectors, Boursa Kuwait’s Industrials and Financial Services sectors gained the most for the month at 7.4% and 4.8% respectively while Utilities and Healthcare sectors lost 3.4% and 2.9% respectively in the month. Among Premier Market stocks, Bahrain based Ahli United Bank and Jazeera Airways gained the most for the month, rising by 14.2% each. During the month, Kuwait Finance House general assembly approved the merger with Ahli United Bank after receiving approvals from both Central Bank of Kuwait and Central Bank of Bahrain. The deal valued around USD 11.6 billion would be one of the biggest cross-border mergers in the GCC region and a significant one for the region’s banking sector. The deal is subject to acceptance from AUB shareholders along with other regulatory requirements. Jazeera Airways continued its upward momentum in the month of July, adding two new destinations in Saudi cities of Abha and Hail in a bid to expand its network and services in Saudi Arabia.

Central Bank of Kuwait has raised its discount rate by 25 bps to 2.5% in the month of July. The move came on the back of another U.S Fed’s 75 bps rate increase. Central Bank of Kuwait continues to take a less hawkish stance in raising interest rates, relative to the U.S. and its other GCC counterparts. As the Kuwaiti Dinar is pegged against a basket of currencies that includes the U.S. Dollar, there is more flexibility for Kuwait to deviate from the U.S. Fed policy compared to other GCC countries, whose currencies are pegged directly to the U.S. Dollar. S&P affirmed Kuwait’s currency sovereign credit ratings at A+ and upgraded the outlook from negative to stable, given the supportive oil environment. S&P further estimates Kuwait’s economy to grow by 8% in 2022 followed by 5.5% in 2023. In another potential banking sector merger, Kuwait’s Gulf Bank and Al Ahli Bank are exploring a deal that would essentially entail one of the two banks to acquire the other. 

Regionally, GCC Markets moved in tandem with global markets with S&P GCC composite index rising by 5.8% for the month. All GCC markets ended positive for the month with Qatar and Oman equity indices rising the most, gaining 9.7% and 9.9% respectively. Saudi Arabia’s equity index also posted a gain of 5.9% over the same period, meanwhile the gain in UAE markets was relatively more modest with Abu Dhabi and Dubai markets rising by 3.1% and 3.6% respectively. All the GCC sectors ended the month in green, with Healthcare and Industrials stocks gaining the most for the month at 11.3% and 9.2% respectively. Banking stocks also gained 7% in the month, with Fitch expressing expectation of strengthening profitability for Saudi and UAE banks in 2022-23, with the help of higher oil prices and rising interest rates.

Most of the GCC central banks also raised interest rates during the month, with UAE, Saudi Arabia, Qatar and Bahrain raising rates by 75 bps. The Central Bank of the UAE estimates the country’s first quarter economic growth at 8.2% on the back of higher oil production. As per the estimates the real GDP is expected to grow 5.4% in 2022 and 4.2% in 2023. Dubai's Inflation (CPI) rose by 5.84% YoY in June 2022, on the back of rising prices within the recreation, sport, and culture, transport and food and beverages sectors, according to the latest data by the Dubai Statistics Centre. Moody’s credit rating agency expects Saudi Arabia’s economy to witness an average growth of around 3.9% from 2022 to 2026 on the back of moderate debt levels and substantial fiscal reserve buffers. Total value of contracts awarded in the GCC increased by 11.7% YoY in the second quarter of 2022 to touch $22.8 billion, with Saudi Arabia and Oman making up for the dip witnessed in Kuwait, Bahrain, Qatar, and the UAE.

Developed markets’ performance was positive during the month of July with MSCI World and S&P 500 gaining 7.9% and 9.1% respectively. Japan’s TOPIX was up 4.7% while UK’s FTSE gained 3.5%. Several wall-street banks upgraded US’s second quarter GDP forecast ahead of GDP data release with JP Morgan increasing the growth estimate from 0.7% to 1.4%, while Goldman Sachs raised their growth estimate from 0.6% to 1%. In contrast to market expectations, US GDP data released toward the end of the month revealed second straight quarter of contraction, with the U.S. GDP declining at an annual rate of 0.9% in the second quarter. UK’s Inflation surged to 9.4% in June, its highest rate since early 1982 driven by a 42% YoY rise in petrol prices and roughly 10% rise in food prices. The European Central Bank raised interest rates for the first time since 2011. The rate hike of 50 basis points was coupled with introduction of a new tool - TPI (Transmission Protection Instrument) that would allow ECB to buy bonds of member countries it believes are experiencing an unwarranted deterioration in financing conditions. Chinese equity markets ended the month in red, dipping 4.3% over the month, with downward pressure on the property market. Goldman Sachs cut its earnings outlook for MSCI China stock index to zero from the earlier outlook of 4% over growing concerns around the real estate sector.

Oil prices declined by 4.2% for July 2022, although clocking a year-to-date increase of 41.4%. The oil prices were under pressure in the month of July with lower US gasoline demand during the peak summer driving season coupled with rising covid-19 cases and government restrictions in China. Despite the downward demand pressure and rising rates, supply tightness continues to support oil price.  The supply constraints are more amplified for natural gas, which increased by 51.7% in price over the month, owing to supply disruptions related to the maintenance of Nord Stream I pipeline of Russia that caters to the energy demand of the Eurozone, especially Germany. Russia initially restored 40% capacity and reduced them to 20% citing sanctions.