Falling oil prices trigger stocks sell-off in Gulf

JEDDAH: Fall in oil prices last week triggered widespread selling on major Middle East stock markets with the Tadawul and Dubai bourses leading the slide on Sunday.

The Tadawul All-Shares dropped 549.51 points or 6.86 percent to close at 7,463.32 points.
Dubai’s leading DFM Index plummeted 6.96 percent to close at 3,451.48 points, while Abu Dhabi's index dropped 5 percent.
Brent crude, a benchmark for international oil, closed at $45.46 while the price of US crude ended at $40.45 on Friday.
About Tadawul’s plunge, Basil Al-Ghalayini, CEO of BMG Financial Group, said the Saudi stocks price fall does not necessarily reflect the fundamentals of the underlying companies. “The Saudi economy still enjoys sound fundamentals, in view of its financial reserves, coupled with the newly appointed young decision-makers at the leadership level who come from the business community,” Al-Ghalayini said.
Mohamed Ramady, professor of finance and economics at King Fahd University of Petroleum and Minerals, said: “Saudi Arabia is in a globalized economy and negative news will always affect it, especially one that is as important as the economic slowdown and financial market crisis in China.”
He said: “Oil prices have been underpinned by a false sense of demand from both Chinese and Indian strategic oil reserves buildup, and not real demand from economic growth, and this has propped up prices but generally the expected balancing of the oil markets will now last longer than expected, due to resilience by the shale producers and others coming back to the market like Iran, Libya and even Russia, which is recording large production gains, and oil prices will remain weak for at least the next two years with prospects of further financial reserves drawdown, domestic borrowing and fiscal pressure to cut back on some non-essential projects.”
Ramady added: "All this will impact the Gulf stock markets with the possible exception of Dubai which stands to gain from renewed Iran trade and the ongoing projects for Expo 2020.”
Akber Naqvi: executive director at Al-Masah Capital Management Ltd., said: “Regional markets like global markets are going through a severe correction. At this stage, panic selling and margin calls are dictating the trend. Until oil finds a bottom and a new trading range, regional markets can expect further volatility and possibly more indiscriminate selling.”
He said: “Regional economies will have to adjust if oil stays at low prices for a prolonged time as that will impact spending. Countries like the UAE (diversified) and Saudi Arabia (large reserves) can withstand longer than others (Oman) but in general a period of subdued economic activity looks more likely if oil takes up a trading range below $50.”
Commenting on Tadawul’s fall, Naqvi said: “Current conditions require patience and cash in order to wait out the volatility and let the markets find their new equilibrium.”
He said: “In uncertain market conditions investors have to go back to the fundamentals; invest in companies and businesses that are growing and pay out dividends, invest in sectors and industries that show resiliency no matter the economic environment (healthcare, education, etc.) and are driving the country’s growth (tourism, aviation etc) and diversify your portfolio across more asset classes (fixed income, private equity etc.) thereby reducing your risk.”
Naqvi said: “Smart investors will have raised cash in the last few months and sat on the sidelines meaning current markets levels may even be seen as new opportunities; for anyone who missed out on the regional rally that started around July 2012, they should now consider this a new opportunity to catch the next, new wave and market cycle. Build a new portfolio slowly and strategically and over the medium to long term current entry points may turn out be a smart investment decision.”
A regional economist, based in Bahrain, said: “The stock market — partly because of the petchem connection, partly because of broader macroeconomic and confidence effects — is connected to the oil price. The oil markets, having recovered nicely in the spring, have experienced another relapse. This is partly because of persistent oversupply, partly due to people try to understand the impact of an increase in Iran's exports, but also, very importantly, because of renewed anxiety about the health of China's economy. China is the most important source of incremental oil demand globally.”
He said: “This cluster of uncertainties is creating anxiety in the markets. Unless and until things are clarified in a more positive direction, the markets are likely to experience bouts of volatility.”
Camille Accad, economist at Asiya Investments, said: "The Tadawul is following global markets, which are on a fall as a result of growing uncertainty in China and Greece. Much of the Saudi market performance this year will depend on how the rest of the markets fare — especially given its recent opening to international investors and its dependence on oil.”
He said: “Commodities, including crude oil, are facing strong downward price pressures as China, the world’s top energy consumer, continues to decelerate. The strong correlation between these assets means that Saudi stocks will continue to experience volatility in the next weeks."