Qatar’s stock market is more sensitive to large oil price changes than to small ones, even as the Gulf Cooperation Council (GCC) bourses do not have similar sensitivities to oil price changes, according to an International Monetary Fund (IMF) working paper.
"When testing for the asymmetry relating to the magnitude of oil price changes, we find that stock return sensitivities are significantly higher for large oil variations in Oman and Qatar," the IMF working paper said.
These dissimilarities, in terms of stock market reactions, confirm that the GCC countries still differ in their levels of oil dependency, especially in their efforts to diversify their economies through structural reforms, it said.
Highlighting the presence of heterogeneous profiles in the GCC equity markets after examining the asymmetry with respect to oil price change's magnitude; it said “more specifically, we find that Omani and Qatari stock markets exhibit higher sensitivities to large oil price changes than to small ones."
The significant asymmetries in the relationships between oil prices and stock markets in some GCC countries (Kuwait, Oman, and Qatar), but not in others (Bahrain, Saudi Arabia, and the UAE), means investors should exercise more caution when deciding on the compositions of international stock portfolios, it suggested.
In the GCC equity markets, most stocks are held in domestic non-oil companies and therefore, from a policymaker’s viewpoint, stabilising the impact of oil price change on non-oil growth is key, according to the paper.
The main channel for such stabilisation has been fiscal policy, given the GCC group’s adherence to the exchange rate peg, particularly through public expenditure policy, and in view of the fledgling taxation system.
The working paper said the ongoing and expected structural reforms are important, insofar as they serve to reduce stock market returns’ sensitivities to oil movements.
With respect to the long-term effects of oil price changes, the estimations reveal positive correlations between stock return responses and the magnitudes of oil price changes in Oman and Qatar.
The GCC region holds 30% of the world’s crude oil proven reserves and represented roughly 34% of world oil exports in 2016.
Equity returns fall to the extent that market participants expect an adverse impact on non-oil growth, of which the expected fiscal adjustment (especially government spending) is a key determinant.
The sensitivity of stock return to price decline is likely to improve while oil price declines, insofar as market participants expect a higher probability of an adverse impact on non-oil growth due to fiscal adjustment.
That impact is tempered, in that the fiscal adjustment is complemented by reforms that diversify the economic base and increase non-oil growth resilience over time.
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