The article first appeared on OMFIF on Jan13rd, 2025

Karine Kheirallah is Managing Director, Head of Investment Strategy & Research – MEA, State Street Global Advisors.

Attraction for investors is less about oil and gas and more about future growth

The Gulf Cooperation Council region, encompassing Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Bahrain and Oman, is undergoing a transformation. Historically tied to energy prices, the region is now diversifying its economies and enhancing its attractiveness for domestic and international investors. This is being reflected in equity and bond market performance.

GCC economies are projected to grow at a rate of around 4% per annum over the next five years, more than double the gross domestic product growth rate of advanced economies. This growth is fuelled by the region’s dominance in global energy markets but also by government-led initiatives aimed at diversifying local economies away from oil and gas. The vision plans launched by each GCC country, with the goal of sustainable economic development, are central to this transformation.

Evolving GCC equity markets

GCC equity markets have evolved from limited access to greater global integration. The inclusion of GCC countries in the MSCI Emerging Markets Index and MSCI All Country World Index is testament to this progress. While the GCC’s representation in the EM index has increased considerably, the region remains underrepresented in global indices, suggesting potential for further growth.

By sector, financials are dominant in GCC equity markets. However, we expect this sectoral concentration to shift as diversification efforts gain momentum and developments in areas such as healthcare, education, smart infrastructure, renewable energy and technology present investors with a wider array of growth opportunities.

Historical performance and diversification benefits

According to Bloomberg data, GCC equities have consistently outperformed the broader emerging markets index over the past decade, despite various global challenges. What may be surprising for some is that GCC equities actually exhibit a lower-than-expected correlation with oil prices — relative outperformance is attributed to the region’s resilience and strategic efforts to diversify its economic base and equity markets.

A key draw for global investors is the low correlation of GCC equities with both developed and emerging markets, as the region’s distinct sectoral exposure differs significantly from technology-heavy global markets. Furthermore, lower currency risk stemming from the stability of its dollar-pegged currencies enhances GCC’s attractiveness in a volatile global economic environment.

The rise of GCC fixed income

The GCC’s economic diversification plans have driven substantial fixed income issuance to fund growth. The total amount of outstanding bonds issued by GCC countries has more than tripled since 2019, reaching nearly $1.4tn by September 2024. Of particular note has been the surge in local currency bond issuance, indicating a deepening of local bond markets. There has also been a notable rise in Sukuk and green bond issues, reflecting the GCC’s commitment to diversifying the economy and promoting sustainable development.

A key attraction for investors is the outperformance of GCC bonds versus the broader JP Morgan EMBI Global Diversified Index over the long term. They have also exhibited lower volatility and drawdowns compared to their emerging market counterparts.

Vision plans and thematic opportunities

The vision plans are key drivers of the GCC’s transformation. These plans encompass a wide range of objectives, including developing non-oil sectors, promoting private sector investment and enhancing social and environmental sustainability.

Initial public offerings are playing a crucial role in the diversification efforts, providing opportunities for investors to participate in the growth of new sectors. We expect that the development of exchange-traded funds focused on GCC equities and bonds will further enhance investor access and liquidity.

Looking forward, the GCC region offers growth potential, diversification benefits and evolving sector dynamics. Challenges such as liquidity constraints and a volatile geopolitical landscape should be noted but the GCC’s transformation and integration into the global financial system make it an investment destination worth considering for any well-diversified portfolio.