Effects Of Oil Price Changes On Stock Markets Of The GCC Report

Executive Summary.

Past studies have shown that international oil price movements are likely to affect the performance of the stock market. This is mainly attributed to the fact that higher oil prices result in concerns and fears about economic growth and consequently the corporate earnings. However, empirical evidence gathered from the emerging markets, do not support this assertion. This evidence is not clear-cut on the exact impacts of oil prices on the performance of the stock market. This report seeks to investigate if there is any short-term and/or long-term correlation between oil prices and performance of the stock markets of the Gulf Cooperation Council (GCC) countries. Strong positive correlation was found to exist in Qatar based on short-term analyses. Interestingly, the results showed that where causality is present, the oil prices directly affect the stock markets. The long-term analyses on the other hand indicate that with the exception of Bahrain, there is zero correlation between oil prices and the stock market performance. In GCC countries.

Introduction

There have been numerous studies on the positive correlation between macro-economic variables and oil prices. A number of these studies have shown that economic activities both developed and emerging economies are significantly affected by oil price fluctuations (Balaz & Londarev, 2006.pp.511). Furthermore, empirical evidence in other papers shows has shown that the relationship between oil prices and economic activity is not a linear one. Hamilton for example illustrates that price increases tends to impact economic growth more than the impact caused by a decrease in oil prices (Arouri, Bellalah and Nguyen).
In theory a stock’s market value is equal to the summation of the discounted future cash-flows expected from the stock. These expected cash flows are affected by the macroeconomic events which are in turn affected by the oil shocks. This explains the justification for using oil price variations as a factor affecting the stock prices. Based on this rationale, changes in oil prices are likely to influence the stock performance. The fact that the GCC countries supply the bulk of oil used in the world today, makes their stocks markets more susceptible to the impacts of oil price fluctuations.

How GCC stock markets respond to oil price movements

Established in 1981 the GCC comprises of six countries Oman, Barain, Saudi Arabia, Qatar, Kuwait, and the United Arab Emirates (UAE). These countries portray a number of common factors. Together, they supply about 20% of the world’s oil, they control approximately 36% of the global oil exports and own 47% of know oil reserves in the world. The primary determinants of government budget revenues, earnings, aggregate demand and expenditures in the GCC countries are Oil exports. The key stock market financial indicators for the GCC countries are represented in table 1. From the table we observe that Saudi Arabia, Kuwait and the UAE are the largest economies of the GCC countries, for these countries the make capitalization/GDP (stock market indicator) has a positive correlation with the significance of oil.
GCC countries import manufactured products from both developed and emerging countries. Therefore fluctuations in oil prices can impact GCC markets indirectly, by influencing the prices of the imported products. An increase in the oil prices often results in inflation for the imported commodities; consequently, this may lead to significant interest rate changes in for the GCC countries’ economies (Arouri, Bellalah and Nguyen). The sum effect of this macro-economic web is that domestic price levels, corporate earnings and output, and share prices in the stock markets in these GCC countries have some impacted by oil price fluctuations. However, unlike oil importing countries where the relationship between increase in oil prices and performance of stock market is negative, the correlation of the impact of oil prices on stock market performance is dependent on which factors outweigh the other i.e. it could have a positive, negative or zero correlation.
Also from the table we notice that Saudi Arabia has the largest market capitalization in the region. Except for Oman, the stock market capitalization is more than the GDP. Generally, the GCC markets have small numbers of listed firms; have low diversification and large holdings by institutions. Finally, the GCC countries differ in the extent on which they depend on oil. The UAE and Bahrain, for example, are not as oil–dependent as Qatar and Saudi Arabia.

The effect of oil prices changes on stock prices of Qatar Exchange relative to the region and the world

The discussion is based on date from June 2005- October 2008 for the GCC member countries and global stock market.
Figure 1: Oil prices vs. stock market indices
The GCC stock markets experience a higher volatility relative to the global market. Qatar is third in the region in terms of weekly returns. Qatar also is second after Saudi Arabia in terms of the risk level in its stock market.

Recommendation:

Whereas the oil price fluctuations affect the general macroeconomic activity of most countries, this correlation is not so straight forward for GCC countries. As such proper studies need to be done to establish this correlation.

Conclusion:

Since the GCC countries are the major world exports of oil, changes in oil prices are likely to have a greater impact on their stock markets. However the impact of oil prices varies depending on number of other factors e.g. the level of diversification in the country.

Work Cited

Balaz, P., and A. Londarev, 2006, “Oil and its Position in the Process of Globalization of the World Economy,” Politicka Ekonomie, 54(4), 508-528.Print
Arouri, Mohamed El Hedi, Mondher Bellalah, and Duc Khuong Nguyen. 'Further Evidence On The Responses Of Stock Prices In GCC Countries To Oil Price Shocks'. INTERNATIONAL JOURNAL OF BUSINESS 16.1 (2011): 90-101. Print.