Sectoral equity returns and portfolio diversification opportunities across the GCC region

We examine the spillover effects of local and global shocks on Gulf Cooperation Council (GCC)-wide sector equity returns. We find the GCC-wide sector returns have asynchronous responses to global and regional shocks. Although the effects of these shocks differ in magnitude across individual GCC-wide sector returns, there is evidence that the GCC-wide sector equity markets are mostly driven by their own volatilities. For the basic materials, telecom and utility sectors, the effects of regional and global shocks are lower in magnitude in comparison to the rest of the GCC-wide sector indices. Applying a time-varying spillover model, we also indicate that the effect of global shocks on the volatility of GCC sector returns has been decreasing, whereas regional shocks have been affecting the sector indices with a positive and significant trend. We also document that portfolios diversified across GCC-wide sectors perform better than portfolios diversified across GCC national equity markets. To some extent, portfolios diversified with a mix of GCC-wide sector and national equities produce higher returns than portfolios made up of pure GCC national equity indices or GCC-wide sector indices.

► GCC sector equity markets are mostly driven by their own volatilities. Global shocks affect GCC sector indices with a downward sloping trend.
► GCC-wide sector returns have asynchronous responses to global and regional shocks.
► Portfolios diversified across GCC-wide sectors perform better than portfolios diversified across GCC national equity markets.