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GCC markets correct in 2Q14 on geopolitical developments Deteriorating situation in Iraq main factor

GCC equity markets experienced a correction in 2Q14 following a very strong performance earlier in the year. The S&P GCC index was off by 1.8% during the quarter, reducing gains from the beginning of the year to 8%. The much anticipated correction appeared to be triggered in part by the deteriorating situation in neighboring Iraq. While regional markets underperformed their international counterparts in 2Q14, they continued to fare relatively better year-to-date, thanks to their strong performance during the first five months of the year. As of the end of June, GCC markets’ capitalization stood at $1.06 trillion, having shed $21 billion in 2Q14. The recent political developments in Iraq have been the main factor behind the retreat of regional markets. However, other country and stock specific factors helped fuel what has been seen as an overdue correction. 

Markets in the UAE saw the selloff begin when the central bank warned in early June of a possible bubble in the residential real estate markets in Dubai and Abu Dhabi. In Dubai, this was exacerbated when a surprise resignation at a major blue chip company triggered further selloff. In Qatar, talk related to the hosting of the World Cup event planned for 2022 encouraged the correction on the Qatar Exchange. 
GCC markets had seen strong rallies in the first five months of 2014, led especially by gains in UAE and Qatar.  The decision by MSCI to upgrade the UAE and Qatar to “emerging market” status from “frontier markets”, which took effect in June, gave a strong boost to regional markets. 
 
In addition to that, the outlook for the GCC economies remained favorable especially when compared to emerging markets that continued to show signs of weakness.  Solid fiscal positions supported by high oil prices also promised a solid base for continued strong development spending. Strong corporate profitability, which picked up and is expected to continue to improve, also fed into the regional rally. Among regional markets, the Dubai Financial Market (DFM) saw the biggest correction in 2Q14, declining 11.4%. Even with this decline, DFM remained the best performing market in the region ytd. 
By contrast, Bahrain Stock Exchange (BSE) was the best performing market in 2Q14, gaining 5.2%, followed by Oman’s stock market with a 2.2% gain. The Saudi market was flat on the quarter while all remaining GCC markets were off.  
 
Liquidity in the market continued to improve in 2Q14. GCC daily traded volumes averaged $3.9 billion in 2Q14, up 51% from the 1Q14 average.  The rise in volumes was particularly significant in UAE and Qatar as fresh liquidity entered these markets in anticipation of the MSCI upgrade. GCC markets have been quite volatile since the end of 2Q14. Particularly, Dubai’s market gained 16% in the first week of July.  Investors remain quite optimistic about the region despite the strong declines seen in June as the GCC continues to have a positive outlook in the medium term. 

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