Exploring the Futures of GCC Equity Markets
Key findings
- The Gulf Cooperation Council (GCC) equity markets have had historically lower correlations with the broader emerging and world markets, raising their diversification value in global equity portfolios.
- Changing market dynamics in GCC countries have helped them outperform the broad emerging-market (EM) universe so that, over the last five years, adding GCC exposure improved return and lowered risk in emerging- market equity portfolios.
- Futures on the MSCI GCC Countries Combined Index can provide investors a cost-efficient tool to tactically manage GCC country exposures and portfolio risk.
The GCC region — established in 1981 and composed of the United Arab Emirates (UAE), Bahrain, Saudi Arabia, Oman, Qatar and Kuwait — has been gaining a larger presence in global portfolios as its weight in key market indexes has increased. Structural reforms, such as easing limits on foreign ownership, upgrading financial infrastructure and enhanced regulations, have further opened these markets to global equity investors.[1]
GCC equities have had lower correlations, 0.53 and 0.52, with developed markets (MSCI World Index) and EM (MSCI Emerging Markets Index) over the last 20 years ending February 2025, offering potential diversification benefits for global portfolios. Unlike many EM, GCC countries are pegged to the USD, minimizing foreign-exchange risk for USD-denominated portfolios.
We recap how the GCC equity markets have evolved, their role in global portfolios and how they differ from the broader EM. Investors can now use index futures linked to the MSCI GCC Countries Combined Index to gain tactical exposure and improve risk management.
Rising weight of GCC markets in EM and world indexes
The MSCI GCC Countries Combined Index reflects the equity market performance of the six country markets it includes.[2] The inclusion of Saudi Arabia in the MSCI Emerging Markets Index in 2019 and of Kuwait a year later marked milestones for the GCC region. Since year-end December 2014, GCC representation in the MSCI ACWI Index grew to 0.7% at year-end December 2024 from 0.2%, and in the MSCI Emerging Markets Index to over 7% from 1.5%.
GCC markets are less diversified — by sector and country — than broader EM
Financials accounted for over 57% of the market-cap weight of the MSCI GCC Countries Combined Index at the end of February 2025, followed by materials and energy, at 9% and 8.5% respectively. The energy sector's weight increased markedly following the Saudi Aramco IPO in 2019, accompanied by higher weights in real estate, utilities and information technology (IT). In contrast, the broad EM universe has a more balanced sector distribution, with IT holding the largest weight, followed by financials.
Saudi Arabia had the highest country weight by market cap in the MSCI GCC Countries Combined Index at 62%, and with the UAE (16.9% weight) and Qatar (9.6% weight) accounted for a significant 89%. By comparison, the MSCI Emerging Markets Index had a more diversified country allocation, with the largest representations being China (30.6%), Taiwan (19%) and India (16.8%) for a combined 66% of the index.
Financials and Saudi stocks had largest weights in MSCI GCC Countries Combined Index
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Data period is from Jan. 31, 2006, to Feb. 28, 2025.
GCC markets have differed from EM in performance and correlations
The MSCI GCC Countries Combined Index has underperformed the MSCI ACWI and MSCI Emerging Markets Indexes in absolute and risk-adjusted returns since its inception in 2006, but outperformed the latter over the last decade. A return decomposition shows that valuation changes were a major drag on its performance, whereas earnings growth and dividends contributed positively. Currency impacts were minimal in the GCC markets because of their dollar peg, unlike the full EM universe, whose returns were significantly dampened by currency depreciation.
USD pegs supported returns in the GCC countries
Return contributions are annualized in gross USD from Jan. 31, 2006, to Feb. 28, 2025. The EM and GCC countries are represented by the MSCI Emerging Markets and MSCI GCC Countries Combined Indexes, respectively.
The combined GCC markets have posted lower correlations than those of key individual EM, such as China (0.32) and Taiwan (0.41), as well as against the MSCI Emerging Markets Index (0.52). And, considering oil prices, the correlation of the GCC countries (0.41) was not markedly different from those of the MSCI World and MSCI Emerging Markets Indexes — which were 0.42 and 0.41, respectively — challenging the perception that their performance is heavily tied to oil's price movements.
GCC countries less correlated with MSCI EM Index and major EM
Data period is Jan. 31, 2006, to Feb. 28, 2025. We show the correlation between countries, regions and West Texas Intermediate (WTI) oil, based on monthly returns. The individual markets are the top five in the MSCI Emerging Markets Index by market-cap weight. The world, EM and GCC countries are represented by the MSCI ACWI, MSCI Emerging Markets and MSCI GCC Countries Combined Indexes, respectively. Source: Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis
A GCC markets allocation has helped reduce risk in EM portfolios
A 20% overlay of the MSCI GCC Countries Combined Index in an EM portfolio has historically reduced risk because of the two markets' low correlation. Since Jan. 31, 2006, an allocation of this size would have lowered annualized risk by 166 basis points (bps) and reduced return by 40 bps.
In recent years, structural reforms and government initiatives in the GCC countries have reshaped the region's market dynamics. These changes have helped GCC markets outperform EM over the last five years by an annualized active return of over 630 bps, while maintaining a lower risk profile by 193 bps. Over this five-year period, an EM portfolio with a 20% GCC overlay would have improved return by 61 bps and reduced risk by 180 bps.
Derisking potential of GCC allocation in EM portfolio has recently improved
"Since inception" indicates data from Jan. 31, 2006, to Feb. 28, 2025. Annualized risk was calculated based on monthly returns.
Index futures, a new tool to manage GCC exposure
Investors can now use index futures linked to the MSCI GCC Countries Combined Index to help support tactical asset allocations to the region in response to macroeconomic shifts, such as oil-price fluctuations or regional policy changes. Using futures in lieu of trading individual securities or rebalancing funds reduces liquidity constraints and operational complexities.
Given the lower volatility and correlations with broader EM and world equity universes, GCC futures may also serve as a key risk-management tool in global portfolios. With the tightening of the Uncleared Margin Rules, investors seeking exposure to GCC countries, but desiring to avoid over-the-counter (OTC) derivatives, may consider centrally cleared GCC futures as an alternative.[3]
1 Andrew Mills, “Qatar drafting new laws aimed at boosting foreign investment,” Reuters, Jan. 23, 2025.
Agnivesh Harshan, “Saudi Vision 2030: Explaining Kingdom's 'National Investment Strategy,'” Global Business Outlook, Oct. 23, 2023.2 The UAE, Saudi Arabia, Qatar and Kuwait are classified as EM, while Bahrain and Oman remain frontier markets.3 Uncleared Margin Rules require counterparties in noncentrally cleared derivatives (OTC) to post margin, reducing systemic risk. By 2025, full implementation will drive market participants toward centrally cleared instruments, such as index futures, which offer capital efficiency, lower margin requirements and reduced operational complexity compared to OTC derivatives, enhancing liquidity and risk management.
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