Kuwait – Mubasher: Gulf equity markets reeled due to weaker oil prices, after Brent and US crude oil futures fell sharply in the middle of the previous week and then tested fresh six-and-a-half-year lows, according to a new report by Global Investment House (Global).

GCC economies are still strictly dependent on oil prices, in which a sharp decline forecasts lower revenues.

“Given [the] heavy current expenditure that GCC governments have become embroiled in, following heavy budget surpluses in recent history, this would either mean curtailing the much needed capital expenditure or sustaining massive budget deficits; the latter being an option bearable only in the short term, and only if they draw down on their reserves and/or borrow from the market,” the report revealed.

Fitch’s recent downgrade for Saudi Arabia’s outlook for foreign and local currency issuer default ratings (IDRs) from “stable” to “negative” further increased the drop in the GCC, Global said, adding that one-year USD/SAR forwards leaped to their highest levels “since 2003 in the last few days as banks hedged against the risk of the peg breaking; a development perceived by the market as being quite disquieting.”

Earlier this week and during the major sell-off, GCC stock markets that had been rising two weeks before, changed course and reversed their gains, while those that were already in the red, deepened their losses.

The Saudi market plunged 30% year-on-year and 10% year-to-date, the report revealed, adding that its Kuwaiti counterpart was down 21% YoY and almost 11% YTD.

“Valuations no doubt became cheaper; take for instance the KSA market, which had traded at a P/E band of 13.1x – 22.0x over the last 4 years, as per Bloomberg, stood at 15.8x,” the report highlighted, adding that this figures signify a 5% discount to the four-year average of 16.6x.

Moreover, a study of the MSCI GCC Index relates similar information, trading at 12.6x after having traded in between 13.1x and 19.2x over the same period.