Posted on October 18, 2014

Markets across the Middle East tumbled on Thursday as global equities and oil prices continued to decline, while Saudi Arabia's drop was magnified by investors selling to prepare for a $6 billion initial public offer of shares, said Arabian Business. Brent crude oil, which has slid more than 28 percent since June because of slow demand growth and signs that producers are not cutting output, hovered around $83 per barrel, near a four-year low.

Economists and fund managers continue to believe the oil price decline will not be disastrous for Gulf economies and markets. Governments have huge fiscal reserves that will allow them to keep spending, even though they may slow the growth in their budgets if oil prices stay low for a long period. "Lower oil prices shouldn't cause too many problems for the Gulf economies thanks in large part to their relative prudence over the past decade," Jason Tuvey, Middle East economist at London's Capital Economics, said in a report.

"Even so, weaker growth in oil production and less supportive fiscal policy mean that the Gulf economies are likely to slow over the coming years and growth rates of 3-4 percent, rather than 6-7 percent, will become the 'new norm'." Growth rates of 3-4 percent would still be healthy by global standards, but the sight of oil prices collapsing and volatility in international equity markets has spooked some Gulf retail investors.

The main Saudi index closed 3.6 percent down after tumbling as much as 5.7 percent earlier in the session. The benchmark has now erased all of the 14 percent gains which it posted after authorities announced in late July that they would open the market to direct foreign investment early next year. Saudi Arabia's largest lender, National Commercial Bank, will open subscriptions for its IPO - the largest-ever in the Arab world - next week, and investors were cashing out to prepare for that.

"This comes on top of the perceived correlation of crude prices going down and the index going down," said Sanyalak Manibhandu, manager of research at NBAD Securities in Abu Dhabi. "What tends to happen is that as the market goes down, people start to capitulate and sell." Lower oil prices look likely to erode the competitive advantage which Gulf petrochemical producers enjoy over foreign rivals, and petrochemical stocks are heavily weighted in the Saudi market. Shares in Saudi Basic Industries, one of the world's biggest petrochemical producers, fell 5.7 percent on Thursday.

Based on monthly changes in the last 10 years, SABIC's share price has only a moderate correlation with Brent crude, according to Reuters data, with an index of 0.5 out of a maximum of 1.0. The Saudi petrochemical index, tracked since 2007, has a stronger correlation of 0.65. But the overall Saudi stock market index has a weak correlation of 0.36. Shares in Al Rajhi Bank, Saudi Arabia's largest listed lender, fell 4.3 percent after it posted a 3.2 percent drop in its third-quarter net profit. The bank made 1.66 billion riyals ($442.6 million) in the quarter while analysts had expected 1.9 billion riyals.

Dubai's bourse tumbled 5.0 percent, extending its decline late in the session in reaction to Saudi Arabia's drop. The benchmark was among the most volatile in the region after closing below its 200-day average on Wednesday for the first time since 2012, a bearish technical signal. Most stocks were in the red and builder Arabtec Holding, one of the more volatile names, plunged 8.7 percent. Dubai's market and economy have little direct exposure to oil, but the bourse's pool of active retail investors and correlation with the emirate's voaltile real estate market make it very vulnerable to global trends.

Abu Dhabi's index fell 2.3 percent in a broad sell-off. Abu Dhabi Commercial Bank was the main drag, down 3.6 percent. Qatar's benchmark dropped 2.9 percent as almost all shares fell. Oman's market tumbled 3.3 percent, its biggest one-day decline since February 2011, as all liquid stocks fell. Egypt's bourse, which edged up in the previous session, turned around on Thursday and dropped 3.4 percent.

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