Where Are GCC Stock Markets Headed in 2024?

Economic

Stocks

Summary:

Bourses will continue to witness more IPOs and attract investors, analysts say.

GCC stock markets will continue on a strong growth trajectory this year, led by the UAE and Saudi Arabia, on the back of strong macroeconomic fundamentals, a vibrant investment landscape, cooling inflation globally and higher expectations of rate cuts, analysts say.

Economic growth, especially in the non-oil sector, will strengthen in 2024, driven by strong government spending, which in turn will support markets.

"Saudi Arabia and the UAE appear particularly promising from an economy and markets perspective," said Faisal Hasan, chief investment officer and head of asset management at Al Mal Capital.

"The region will continue to see a strong pipeline of [initial public offerings], which will increase the breadth of the markets."

Stock markets in the GCC ended the year on a largely bullish note, in line with a strong rebound in regional economies.

The GCC equity market index closed 2023 at 714.69 points, registering a gain of 3.7 per cent, after recording mixed performances at the country level, Kamco Invest said in a note.

Saudi Arabia's Tadawul stock exchange, the Arab world's biggest, closed 2023 up 14.2 per cent, while the Dubai Financial Market was the best performing index, ending the year 21.7 per cent higher.

The Abu Dhabi Securities Exchange, the region's second-largest stock market by value, fell 6.2 per cent for the year.

The Qatar Stock Exchange ended 2023 up 1.4 per cent, Bahrain was up 4 per cent, Oman's index closed 7.1 per cent lower, while Kuwait's bourse was down 6.5 per cent for the year.

Markets in the wider Mena region also posted a mixed performance. Egypt's EGX 30 index was the best performer in the entire region, gaining more than 70 per cent last year.

This was followed by Morocco with gains of 13 per cent, Lebanon up 10 per cent, Tunisia posting an increase of about 8 per cent, while Jordan's index ended the year around 3 per cent lower.

"The UAE and Saudi Arabia lead the region and have undertaken ambitious diversification efforts to reduce oil dependence and stimulate growth in non-oil sectors," Vijay Valecha, chief investment officer at Century Financial, wrote in a recent opinion piece in The National.

"These strategic initiatives have significantly affected stock market performance, making them more attractive to investors.

"This was evident in the robust increase in IPO activity, with the GCC region standing out globally."

GCC stock markets recorded a flurry of listing activity last year, with some companies notching significant gains on their trading debut driven by overwhelming investor demand.

There were a total of 29 IPOs with total proceeds of $5.8 billion in the first nine months of the year in the Mena region, with all the listing activity taking place in the GCC, according to the latest report from consultancy EY.

The main drivers for the GCC region's IPO growth include government incentives, foreign investor interest and diversification efforts, analysts say.

The performance in the GCC "highlighted the importance of a strong pipeline of IPOs that are critical for attracting international capital flows and generating resilient market performance", Kamco Invest said.

"Both Saudi Arabia and Dubai exchanges saw IPOs of some of the key companies in the region garnering strong investor demand. The markets, especially Saudi Arabia, were also insulated from the decline in crude oil prices that is still essential for economic growth in the region," it added.

Going forward, markets are likely to record improvements in corporate profits and increased liquidity.

"I see strong investment opportunities in the stocks of banking, retail, technology, telecommunications and tourism sectors in the Gulf stock markets, especially with the surge in IPOs in the Saudi stock market during 2023," Rania Gule, market analyst at xs.com, said.

"The development of the non-oil private sector and improvements in economic indicators, such as an increase in consumer spending and a decrease in unemployment rates, indicate the strength of economic conditions in the GCC countries."

The IMF and World Bank estimate an average Mena growth rate of 3.5 per cent next year, up from 2 per cent in 2023.

This is higher than the global economics growth projections for next year.

The IMF expects global gross domestic product to expand by 2.9 per cent, while the World Bank estimates 2.4 per cent growth and the Organisation of Economic Co-operation and Development forecasts it at 2.7 per cent.

"Non-oil economies across the [GCC] region are set to have another decent performance in 2024, largely thanks to government spending," Edward Bell, head of market economics, at Emirates NBD, said in a research note.

The UAE's economy is expected to expand by 3 per cent this year and 4 per cent next year, driven by strong growth in its non-oil sector, S&P said in a September report.

Analysts also expect large-scale and ambitious reform programmes implemented by policymakers to continue to yield benefits in the region and attract investors.

"Non-oil revenues are gradually increasing in the GCC, providing a positive outlook for their economies. Encouraging indicators include continuous GDP growth, improved performance in the non-oil sector, a growing workforce, stable inflation levels and a declining unemployment rate," said Mr Hasan of Al Mal Capital.

However, analysts cautioned any weakness in developed markets is likely to be felt across the Mena region despite favourable growth dynamics.

Among other main concerns this year is geopolitics outweighing economic risks in the wake of a flare-up in the Israel-Gaza war or a deterioration in the US-China relationship.

"We think the bigger dangers in 2024 will be geopolitical, which have more potential to throw expectations off track," William Davies, global chief investment officer at asset manager Columbia Threadneedle Investments, said last month.

Source: The National News

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ING

Economic

Summary

The monthly activity data was mixed. Industrial production was softer than expected, but the rebound in retail sales was stronger than expected. As Japan's main growth engines are consumption and services, we expect fourth quarter 2023 GDP to rebound despite soft manufacturing activity. Inflation has also came down sharply, which should support the BoJ's dovish stance for now. We believe that the BoJ is preparing for its first rate hike in the second quarter, when the government's stimulus will be supporting growth while another big jump in wage growth is achievable throughout the spring wage negotiation season. Meanwhile, the yield curve steepened from November when the BoJ decided to discontinue its daily fixed-rate purchase operations but the 10Y Japanese government bond (JGB) yields were below the 0.6% level at the end of last year. We think the Bank of Japan is likely to terminate its yield curve control programme in January as market pressures should be off thanks to the global bond market rally and JGB yields have been below the BoJ's hinted proper 10Y level of 0.8%. Also, a new quarterly outlook report could justify the BoJ's policy changes by raising its inflation outlook for FY 2024 and 2025.

Industrial production declined but only marginally so

Industrial production fell -0.9% month-on-month seasonally adjusted in November (vs 1.3% in October, -1.6% market consensus), mainly led by poor vehicles outcomes (-1.7%). There were temporary shutdowns of factories due to shortages of some auto parts. Thus, we expect a rebound in December as production lines returned to normal. We found a rebound in chip-producing equipment (7.2%) is likely to continue. Japan is not a major semiconductor production hub, but is one of the major players in the chip-making equipment industry. Together with upbeat outcomes from South Korea's chip production and exports, we believe the global semiconductor cycle is on a recovery path.

Retail sales rebounded more than expected in November

Retail sales rose 1.0% MoM sa in November (vs -1.7% in October, 0.5% market consensus). The rebound was stronger than expected, but it couldn't fully offset the previous month's decline. But in a positive note, retail sales rebounded in most of the major categories, except food and beverages (-0.8%), signalling the consumption recovery was widespread.

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Damon

Economic

Forex

Here is a recap of the key highlights that shocked global markets in 2023 and the potential emerging themes to look out for in 2024 as well as my "Chart Of The Year".

2023 key highlights & cross-assets performances in the past 2 years

Fig 1: Cross assets performances as of 29 Dec 2023 (Source: TradingView, click to enlarge chart)

The US Federal Reserve's stance of keeping interest rates higher for a longer period in the first half of 2023 triggered a resilient US dollar environment in the absence of a recession scenario in the US that led the US stock market to outperform the rest of the world.

The outperformance of the US stock market in 2023 was led by the Magnificent 7 (Apple, Amazon, Microsoft, Alphabet/Google, Nvidia, Meta, Tesla) mega-cap technology stocks that have stronger balance sheets and are skewed toward "AI productivity" theme play. Also, these 7 stocks have a significant combined market-cap weightage in the Nasdaq 100 that recorded an annual gain of 54% in 2023 (2.3 times S&P 500's 2023 returns).

US regional banking crisis that led to the collapse of Silicon Valley Bank & First Republic Bank due to poor balance sheet risk management reinforced by outsized mark-to-market losses on longer-term US Treasuries (higher US Treasury yields via Fed's tightening monetary policy). It also indirectly led to the demise of Credit Suisse which eventually was brought over by rival UBS.

The US regional banking crisis was just a blip, negated by a liquidity backstop orchestrated by the US Treasury; the Bank Term Funding Program (BTFP).

The risk-off behaviour in Q3 reversed abruptly in Q4 to a raging risk-on FOMO behaviour triggered by a significant easing liquidity condition in the US; the rapid drawdown of the Fed's overnight reverse repo facility from a peak of US$2.55 trillion in December 2022 to US$683.25 billion (-74%) for the week of 11 Dec 2023 as money market funds that choose to invest their surplus cash in short-term US Treasury bills instead (rather than parking in overnight reverse repos facility) which in turn helped to fund the US Treasury general account (also US Treasury's issuance switch from longer-term Treasuries to T-bills for funding needs).

A rise in the expectations of a Fed's dovish pivot where the first Fed funds rate cut is priced in to come as early in March 2024 indicated by the CME FedWatch tool that led to a slide of 120 basis points (bps) in the US 10-year Treasury yield from a 16-year high of 5% printed on 23 October 2023, synchronized with a weakening US dollar that kickstarted a rally in almost all asset classes (equities, bonds, gold, cryptocurrencies) except oil & China-related risk assets.

China's post-Covid re-opening bullish theme play on China and Hong Kong stock markets fizzled out after Q1 due to a heightened deflationary risk spiral caused by a persistent weak property market in China. The Hang Seng Index ended 2023 with a fourth consecutive annual loss of -14% (prior years' losses of -15% in 2022, -14% in 2021 & -3% in 2020); its worst performance streak since 2000.

Due to China's structural weakness (deflationary risk spiral), China, and Hong Kong stock markets failed to respond to the cyclical upswing in risk assets during Q4 2023 reinforced by renewed US dollar weakness. The CSI 300 and Hang Seng Index recorded losses of -7% and -4.3% respectively in Q4 whereas the MSCI Emerging Markets Ex China exchange-traded fund gained by +12.5% over the same period, slightly outperformed the US S&P 500's Q4 return of +11.24%

The Japanese yen (JPY) plummeted to a 33-year low against the US dollar in Q3 2023 due to the Bank of Japan (BoJ)'s newly appointed Governor Ueda's reluctance to offer firm guidance to normalize its short-term negative interest rate policy despite Japan's core inflation rate had exceeded BoJ's 2% target for the 20th consecutive month.

Emerging themes for 2024

A potentially weaker US dollar due to the shrinkage of the US Treasury yield spread premium against the rest of the world, and a potential major JPY strength revival triggered by internal economic factors (service prices in Tokyo rose at their fastest pace since 1994 to a record gain of 3% y/y in November 2023, indicating an increase in the odds of sustainable wage-driven inflationary growth), political and business groups' mounting pressures against a weaker JPY.

The rest of the world equities may outperform the US stock market due to a weaker US dollar environment. Keep a lookout on China for potentially more "generous" fiscal and monetary policy stimulus measures that may stoke positive animal spirits in the short to medium term for China and Hong Kong stock markets.

The stepped-up dovish expectations on the upcoming Fed's interest rate cut cycle compiled with rosy earnings forecasts by analysts polled by FactSet that are projecting an earnings growth of +11.5% y/y for the US S&P 500 in CY 2024, a significant improvement from an expected CY 2023 earnings growth of just 0.6% which in turn have indicated another year of goldilocks scenario for the US economy.

In contrast, the hastened speed of 6 interest rate cuts by the Fed in 2024 projected by market participants in the interest rates futures market also implied a probable US recession-liked scenario in 2024. In addition, the latest November 2023 data of the Conference Board US Leading Economic Index (LEI) has continued to flash a recession signal reinforced by weakness in the housing and labour market. If a recession hits the US economy in the second half of 2024, earnings downgrades are likely to materialize and the initial projected S&P 500 CY 2024 earnings growth rate of +11.5% is likely to be tapered to the downside which in turn may trigger a risk-off scenario that can overshadow the initial positive feedback loop from easing liquidity conditions.

Potential heightened geopolitical tension between the US and China that may also spark a risk-off scenario in the latter part of 2024; the recently concluded China's annual economic work plan conference attended by the top leadership stated that 2024 top priority will be on building a modern industrial system with a focus on developing cutting-edge technologies and artificial intelligence. Making high-tech industrialization a key priority in 2024 is likely to invite more scrutinization from neo-conservative US politicians that may put a strain on the current US-China relationship in the run-up to the November 2024 US presidential election. There is likely to be intense debate among the presidential candidates and finger-pointing again at China's current industrialization policy that needs to be "neutralized" due to its potential national security threat to the US.

Chart Of The Year – a potential major top in USD/JPY

Fig 2: USD/JPY major trend as of 2 Jan 2024 (Source: TradingView, click to enlarge chart)

The price actions of USD/JPY have declined by 8% to hit an intraday low of 140.25 in December 2023 after a bearish reaction from its 151.95 long-term pivotal resistance printed in mid-November 2023.

The USD/JPY has traced out a potential impending major bearish reversal "Double Top" configuration considering the developments of its price actions from October 2022 to November 2023.

In addition, the weekly MACD trend indicator has flashed out a bearish divergence condition over the same period (October 2022 to November 2023) which indicates the major uptrend phase from the March 2020 low of 101.18 has started to lose upside momentum which in turn increases the odds of a multi-month corrective decline to unfold next.

A breakdown with a weekly close below 137.65 support exposes the next major support zone of 130.70/127.10 (also the neckline of the "Double Top" & 50% Fibonacci retracement of the prior major uptrend phase from March 2020 low to November 2023 high).

On the other hand, a clearance above 151.95 invalidates the bearish scenario to see the next major resistance coming in at 159.30 in the first step.

Source: MarketPulse

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Devin

Economic

Forex

Sterling just had its best year against the dollar since 2017, yet a weakening economy and election uncertainty make a repeat performance unlikely.

It is not hard to see why investors flocked back to Britain's currency after it hit a record low only 16 months ago: the economy did better than feared, sticky inflation meant the Bank of England was set to wait longer than its peers with monetary easing and the dollar's appeal waned on expectations for an early U.S. rate cut.

The pound, trading near $1.28, rose almost 6% last year against the dollar - making it the second-best performing major currency after the Swiss franc.

It is also quite far from an all-time low of $1.0327 it hit in 2022 when then Prime Minister Liz Truss rattled markets by proposing unfunded tax cuts.

While this puts sterling on stronger ground heading into a likely election year, the rally's drivers are losing momentum.

First is the fading impact of interest-rate differentials, a major influence in the $7.5 trillion-a-day global currency market.

Jane Foley, head of currency strategy at Rabobank, said that while a perception that the BoE would lag European Central Bank and Federal Reserve policy easing had boosted sterling, this theme "had been thrown into disarray" by the latest economic data.

UK consumer price inflation eased sharply to 3.9% in November and British gross domestic product was revised downward to show a 0.1% contraction in the third quarter.

Britain might already be in recession, and it has seen the second weakest recovery from the COVID-19 pandemic in the Group of Seven after Germany.

The data prompted traders to bring forward expectations of a first BoE rate cut, with markets now fully pricing in a 25-basis point cut as soon as May compared with August just a few weeks ago.

"The upside for cable has started to look a little more complex," said Foley, referring to the pound/dollar exchange rate.

"Without higher inflation or stronger growth, we could see it top out below $1.30. Until the data, I was more confident we'd hit $1.30."

Sterling Runs into Economic and Election Hurdles After Stellar Year_1

Sterling is traditionally seen as a "risk currency", moving in line with other such assets, most typically equities, and its recent gains have come as MSCI's world stock index headed towards two-year highs.

With valuations becoming somewhat stretched, a global stocks reversal would be a further risk for the pound.

HSBC's head of European currency research Dominic Bunning, said sterling's rally from $1.20 in October to $1.27 in late November was "completely unjustified" from the perspective of interest rate differentials.

"Obviously, if you compare it to equity markets then it looks a lot more sensible," he said. "That's the battle that's playing out. At the moment the equity driver is winning but we are sceptical as to whether that can persist."

He expects sterling to weaken towards $1.20 this year due to British economic weakness, implying a fall of as much as 6% from current levels.

Talking Politics

Another possible source of instability is the British election, which must take place by January 2025, but is anticipated this year, with polls favouring the opposition Labour Party.

The vote's timing could impact sterling by affecting the timing of rate cuts as the BoE tries to avoid being seen as influencing the country's mood around election time, Rabobank's Foley said.

There may also be some caution ahead of a March 6 budget, which could contain new tax cuts, according to local media.

Michael Metcalfe, State Street Global Markets' head of macro strategy, reckons politicians may have learned their lessons from Truss' budget debacle.

"Heading into an election year, that will mean promises of fiscal largesse will be moderate and funded," he said.

To be sure, not all expect sterling weakness ahead, global economic uncertainty means there is much less consensus among forecasters compared to a year ago.

Goldman Sachs for example, sees the pound at $1.35 in 12 months' time, boosted by calmer government bond markets and high equity prices.

Source: Reuters

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Thomas

Palestinian-Israeli conflict

Latest news on the Israeli-Palestinian conflict

0:41

The Islamic Resistance Movement in Iraq announced that it would use a salvo of missiles to attack the U.S. base at the ConocoPhillips oil field deep in Syria, directly hitting the target.

1:14

Just now, Yemen’s Houthi armed forces and the U.S. Navy exchanged fire in the Red Sea.

1:24

BREAKING: Israel's Supreme Court blocks Netanyahu's judicial reforms

Israel's Supreme Court has struck down a key law in Netanyahu's controversial reforms, upholding judicial review.

The 8-7 decision by Israel's Supreme Court is a bold stance aimed at protecting democracy from power grabs.

The crucial ruling echoed mass protests and blocked reforms that were feared to concentrate power and weaken the integrity of democracy.

Latest News on the Israeli-Palestinian Conflict (January 2)_1

4:11

Breaking news: Multiple reports from various media stated that Yemen’s Houthi armed forces attacked a US warship in the southern Red Sea early this morning!

▶Yemeni sources: The Houthi armed forces launched two cruise missiles at a U.S. warship near the Yemeni Hanish Island in the southern Red Sea, but did not hit the warship.

▶The failure to stop Houthi missiles, and the failure of two missiles from the Arleigh Burke-class destroyer to stop two of the three Houthi missiles, further exacerbated the panic”...The Houthi armed forces have a modern anti-ship missile system , the first time in the history of warfare that an anti-ship ballistic missile hit a ship.

5:27

French Armed Forces Minister: "The UNIFIL mission in southern Lebanon could become very dangerous."

6:31

Latest News on the Israeli-Palestinian Conflict (January 2)_2

Putin: No army in the world has the weapons that Russia has now.

7:32

Mohamed Ali Houthi, a senior Ansar Allah official, wrote to the British defense secretary: "As Imam Ali said, we will not fear unless there is an attack; we will not bleed unless it pours."

10:53

"New York Times": Biden administration officials worry that the war against the Houthis will end in Iran's favor

The Biden administration is reportedly under pressure to respond to Ansarullah's attack in the Red Sea.

While the Pentagon has prepared plans for missile and drone strikes against Yemen's Ansarullah base, the Biden administration has expressed doubts about the effectiveness of those plans.

Senior White House officials worry the attacks will benefit Iran and affect the ceasefire between Yemen and Saudi Arabia.

However, some military commanders believe the Biden administration's lack of response will embolden the Houthis to launch new attacks.