Markaz: Global and GCC markets rally to end 2023 on a positive note

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Kuwait City, Jan 04: Kuwait Financial Centre “Markaz” released its Monthly Market Review report for December 2023. Global equities rallied in 2023 due to the decline in inflation from the highs of 2022 and the indication from Fed’s last two meetings that the rate hike cycle could be over with a pivot likely in H2 2024. The performance of GCC Equities were mixed as oil production cuts and escalation of geopolitical risks weighed on their performance. Dubai index outperformed GCC peers due to a strong real estate market and a rebound in the tourism sector.

Kuwait equities, which were among the top performers in 2022, fell in 2023 due to the expected decline in oil GDP and challenging operating environment for banks (Banking stocks account for more than half of Kuwait’s equity markets by market capitalization). Kuwait’s All Share Index posted a yearly fall of 6.5%, driven down by the banking index, which fell by 8.2%. Insurance and Consumer Staples gained the most for the year, rising 47.8% and 37.2% respectively. Insurance stocks were boosted by the increase in premiums written in 2023, which also had a positive impact on the profitability of Insurance companies. Reforms from the Insurance Regulation Unit (IRU), which began with the introduction of the New Insurance Law, have supported the sector. Among banking stocks, Al Ahli Bank of Kuwait (ABK) and Boubyan Bank fell the most during the year, with total returns of -20.6% and -19.6% respectively. ABK’s share price witnessed a sharp decline in mid-2023 following the announcement that Gulf Bank and ABK are no longer pursuing a merger. Commercial Bank of Kuwait (CBK) was the only gainer among banking stocks, with a total return of 10.7% for the year. Among Premier market stocks, Kuwait Real Estate Company and Arzan Financial Group for Financing and Investment gained the most and registered total returns of 100.8% and 93.2% respectively, for the year. Kuwait Real Estate Company’s gains were driven by strong 9M 2023 earnings due to boosted sales in residential properties and higher income generation from operational properties.

GCC Markets were mixed during the year, with only Dubai and Saudi Arabia equity indices ending the year on a positive note. Overall, the S&P GCC Composite index registered a yearly gain of 6.2% in 2023. Within the GCC, Dubai and Saudi Arabia equity indices surged 21.7% and 14.2% respectively during the year on the back of positive investor sentiment and strong earnings growth from major blue-chip stocks. Dubai’s outperformance was driven by a strong economic outlook supported by real estate and tourism sectors in addition to the relative undervaluation of the markets compared to GCC peers. Emaar Developers and Emaar Properties surged with total returns of 77.5% and 40.9% respectively during the year. Emaar Properties and its construction unit reported results in line with the market’s high expectations, with a 42% and 43% increase in their 9M profits respectively on higher retail sales and a rise in real estate demand. Saudi Aramco recorded a total return of 18.5% in 2023 supported by high oil prices and strategic investments made by the company across the world. Abu Dhabi index fell the most at 6.2% for the year dragged down by the performance of major blue-chip stocks. Qatar equity index gained 1.4% for the year despite the drastic fall in natural gas prices.

Global and U.S. markets ended the year on a very positive note, due to the change in stance from the U.S. Fed, which was mostly hawkish during the year despite easing inflation. The MSCI World and S&P 500 indices rose 21.8% and 24.2% respectively during the year. The U.S Fed raised interest rates by 100 bps in 2023 to curb inflation. Following a string of eleven interest rate hikes in 2022 and 2023, the markets have priced in a scenario with a terminal benchmark funds rate of 5.25% to 5.5% a 75-bps rate cut in 2024. The technology sector led the outperformance of the U.S. markets, with the technology heavy Nasdaq 100 index gaining 53.8% in 2023. The main catalyst for the rally was the rising popularity of generative AI, which opened up opportunities in several sectors with the software and hardware space. The MSCI EM index relatively underperformed with yearly gains of 7.0% due to the weakness in Chinese equities and the depreciation of several emerging market currencies for most parts of the year. Chinese markets (Shanghai SE A Share index) declined 3.7% in 2023, weighed down by the real estate property crisis, deflation, and lower demand for China’s exports due to slower global economic growth. India was a notable outperformer in the Emerging market space, with the BSE Sensex registering yearly gains of 18.7% in 2023.

Kuwait’s CPI inflation stood at 3.79% y/y in November 2023, relatively flat compared to the previous month. The UAE Central Bank increased its 2024 growth forecast for the economy to 5.7% from 4.3% previously, due to an expected rise in oil production next year. As reported by Moody’s, Saudi Arabia’s non-oil economy is projected to expand between 3-4% each year until 2030 and constitute 56% of Saudi’s GDP.

U.S headline inflation moderated to 3.1% y/y in November 2023, compared to the highs of 6.4% y/y in January 2023. The core inflation eased to 4% y/y in November 2023, the lowest in the last 2 years and significant drop from the 5.6% y/y recorded in January 2023. UK CPI inflation dropped by more than expected to 3.9% y/y in November from 4.6% y/y in October. The drop in inflation was mainly driven by cheaper petrol costs allowing inflation to reach its lowest levels in 2 years.

The yield on the 10-year US Treasury notes, which was close to 5% in October, dipped sharply in the last two months of 2023 to close the year at 3.88% after the change in stance from the U.S. Fed. There was a similar drop in yields across sub-segments within the fixed income space and across geographies.

Oil price settled at USD 77.0 per barrel, recording a yearly loss of 10.3%. Oil prices fell despite the OPEC+ oil cuts, voluntary oil production cuts by Saudi Arabia and Russia and the geopolitical tensions in the Middle East. OPEC+ had announced oil production cuts of about 3.66mn bpd in 2023, which supported oil prices for most parts of the year while the increase in production from non-OPEC+ members and weak demand from China added downward pressure. Gold prices closed at USD 2,062.6/oz., a gain of 13.1% in 2023 due to the rise in geopolitical risks and the weakening of the U.S Dollar in the last quarter of 2023. Natural gas prices fell sharply by 43.8% during the year due to a rise in output and U.S inventories coupled with the lower-than-anticipated demand for heating in Europe.

Kuwait’s real estate market was stable in 9M 2023. In the initial two weeks of December 2023, real estate transactions in Kuwait reached a total value of roughly KD 98.5 million through 191 transactions, reflecting an increase of 20.2% compared to the corresponding period in the previous month.

The outlook for global asset classes for 2024 is largely dependent on the policy direction taken by the U.S. Fed. Global markets have already priced in a scenario of no further rate hikes, with a possible reversal of rates from H2 2024 or earlier. Any deviation from the current market expectation could affect investor sentiment. As the production cuts from OPEC+ have already had a bearing on the economic growth of GCC countries, the revival of growth depends on the recovery of oil demand. In such a scenario, oil prices are expected to remain at current levels with an increase in production that is driven by a gradual phasing out of oil production cuts. Recovery of Oil GDP, continual growth on non-oil sectors and regulatory reforms could support a rebound in GCC equities.

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