Saturday, 15 March 2025
The Gulf Cooperation Council (GCC) equity markets have emerged as an increasingly valuable component of global investment portfolios, offering diversification benefits and outperforming broader emerging markets in recent years. Comprising the United Arab Emirates (UAE), Bahrain, Saudi Arabia, Oman, Qatar, and Kuwait, the GCC has strengthened its market position through structural reforms, eased foreign ownership restrictions, and enhanced financial regulations, making it more accessible to international investors.
Historically, GCC equities have demonstrated low correlations with developed and emerging markets, with figures of 0.53 and 0.52 against the MSCI World Index and MSCI Emerging Markets Index, respectively, over the past two decades. This lower correlation enhances their diversification potential for investors. Additionally, unlike many emerging markets, GCC currencies are pegged to the US dollar, minimizing foreign exchange risk in USD-denominated portfolios.
GCC’s Growing Weight in Global and Emerging Market Indexes
The MSCI GCC Countries Combined Index, which tracks equity market performance across the region, has seen a steady rise in global indexes. The inclusion of Saudi Arabia in the MSCI Emerging Markets Index in 2019, followed by Kuwait in 2020, marked a significant milestone. As of December 2024, GCC representation in the MSCI ACWI Index had grown to 0.7% from 0.2% in 2014, while its share in the MSCI Emerging Markets Index surged from 1.5% to over 7%.
Despite this progress, the GCC market remains less diversified than broader emerging markets, both in terms of sectoral and country representation. Financials dominate the MSCI GCC Countries Combined Index, accounting for 57% of market capitalization, followed by materials (9%) and energy (8.5%). The 2019 Saudi Aramco IPO significantly increased the weight of energy stocks, while real estate, utilities, and information technology (IT) have also gained prominence.
On a country level, Saudi Arabia represents 62% of the MSCI GCC Countries Combined Index, with the UAE (16.9%) and Qatar (9.6%) bringing the three largest markets to a combined 89% of the index. In contrast, the MSCI Emerging Markets Index is more balanced, with China (30.6%), Taiwan (19%), and India (16.8%) accounting for 66% of the index.
Performance Trends and Correlations in GCC Equity Markets
Since its inception in 2006, the MSCI GCC Countries Combined Index has underperformed both the MSCI ACWI and the MSCI Emerging Markets Index in absolute and risk-adjusted terms. However, in the past decade, GCC equities have outperformed broader emerging markets, supported by earnings growth and dividend contributions. Unlike other emerging markets that have suffered from currency depreciation, the GCC’s USD peg has shielded returns from foreign exchange volatility.
The GCC market also exhibits lower correlation with major emerging markets. For example, China (0.32) and Taiwan (0.41) have demonstrated weaker ties with global equities than the GCC’s correlation of 0.52 with emerging markets. Moreover, despite being oil-driven economies, GCC equities’ correlation with oil prices (0.41) is similar to that of the MSCI World and MSCI Emerging Markets Indexes (0.42 and 0.41, respectively), challenging the assumption that GCC equity markets are heavily dependent on oil price fluctuations.
Risk Reduction and Tactical Allocation with GCC Exposure
Adding GCC equities to an emerging markets portfolio has historically reduced risk due to their low correlation with broader EM trends. Since 2006, a 20% allocation to the MSCI GCC Countries Combined Index within an emerging markets portfolio would have lowered annualized risk by 166 basis points (bps) while only slightly reducing return by 40 bps.
Over the last five years, structural reforms and government initiatives have strengthened the region’s market resilience, resulting in an annualized active return of 630 bps above broader emerging markets. In this period, an EM portfolio with a 20% GCC overlay would have improved return by 61 bps while reducing risk by 180 bps, reflecting the market’s growing appeal among investors seeking stability.
GCC Index Futures: A New Tool for Investors
Investors now have a new avenue to manage exposure to GCC markets through index futures linked to the MSCI GCC Countries Combined Index. These futures provide a cost-effective and flexible method to adjust GCC allocations in response to macroeconomic shifts, such as fluctuations in oil prices or regional policy changes.
Compared to trading individual securities or rebalancing funds, futures reduce liquidity constraints and operational complexities. Given GCC equities’ lower volatility and unique risk profile, these futures could also serve as an important risk-management tool in global portfolios.
With the tightening of Uncleared Margin Rules (UMR) pushing investors away from over-the-counter (OTC) derivatives, centrally cleared GCC index futures offer an efficient alternative by lowering capital costs, margin requirements, and operational risks. This shift is expected to enhance market liquidity and make GCC equities more accessible to institutional investors worldwide.
As the GCC region continues its transformation, its equity markets are poised to play a greater role in global investment strategies, offering both diversification benefits and opportunities for tactical asset allocation.
Source: MSCI
