KSE Index: A Reliable Sociometer?

An In-Depth Look into the Relationship Between the Kuwait Stock Exchange Price Index and the Composite Social Mood.

Socionomic theory proposes that changes in the social mood affect overall social actions. Implying a contrasting view to the conventional, where causality lies within the sphere of the social mood, which in turn affects social behavior. Social mood, however, is subjective by nature, thus had to be objectified in order to be measured and exploited to predict future collective social actions. This objectification was done by Robert Pretcher, Executive Director of the Socionomics Institute, where he saw that social mood could be acutely reflected in financial markets. He tested different social mood hypotheses against the Dow Jones Index (and many other Indices) only to find a bizarre correlation, which validated the socionomic theory even further and made the financial markets a legitimate indicator of predominant social mood, i.e. a sociometer. He took it one step further by reintroducing the Elliot Wave principle, a mix of crowd psychology and Fibonacci numbers sequence, in his own socionomical context. This helped in revealing the volatility in social mood and its repercussions, the fluctuations from pessimistic to optimistic in a never-ending unsynchronized loop and its potential.

The basic premise of this theory is a universal one; being that it reflects an innate quality of all human societies, regardless of ancestry and descent. However, the indicators for these social moods, or sociometers, could be different from one society to another. Meaning that a sociometer is location-bound , and the purpose of this article is to examine whether the Kuwait Stock Exchange Index is a reliable sociometer. Even though the Kuwait Stock Exchange dates back to 1983, the only data found available are of that beyond 1995. Therefore, only this era will be put under scrutiny.

1995-1999

Insert 1995, Kuwait was still in postwar recovery, regularly repaying the $5.5 billion foreign loan to finance its reconstruction from its semi-recovered oil industry proceeds. The domestic economy was stable and the military presence of Kuwait’s western allies eased the worries of the people and regained their optimism. This lead to a rise of approximately 40% in the KSE index reflected at year’s closing. The following year, 1996, new parliamentary elections were held where government supporters gained 60% of parliamentary seats with an astonishing voter turnout of 83.4%. The optimism continued, and the upsurge in the index followed, with another compounded 39.5% increase alongside a turnover amounting to the total market capitalization. Continuation in market rise ensued in 1997, even though different alleged governmental malfeasances were arising at the time. Centrist political grouping was being established informally due to the discontent from the current parliamentary members’ performance. A Political assassination attempt, a first in the country, was carried out mid-year and failed. Yet, the previous political indicators did not leave any mark on the stock market with a constant rise over the year of 39.2%.

This uptrend came to a halt in 1998, a tremendous 40.14% decline came in that year. Even though no significant political events were taking place, this decline could be chiefly attributed to the sharp decline in oil prices which threatened Kuwait with fiscal budget deficits. The same happened in 1999, though not as severe as 1998, the index declined by almost 8%. Surprisingly, the parliamentary dissolution in May of 1999, did not carry any weight on the index as it rose 5% in that month.

As far as the KSE Index is concerned, it has not been a very indicative sociometer for the period discussed beforehand. Political events, holding an immense influence on the social mood, had no major partake on the market; it was mostly moved by economical indicators, such as the slow success of privatization and impressive results of shareholding companies (1995-1997). And then the heavy decline in oil prices which resulted in the year-over-year decline between 1998 and 1999.

2000-2008

In the start of this decade, Kuwait was awarded 15.9$ billion as compensation for oil industry damages brought by the Iraqi invasion, evoking Iraqi accusations and threats. Backed by governmental high-cost arms purchases from the US, the citizens were growing weary of the public policy. Yet, the index still traded sideways with no major indication of social sentiment. In the year that followed, 2001, stagnant governmental policies and the inability to satisfy the public’s housing demands caused immense angst of the people. Nevertheless, the market was slowly launching an uptrend. This uptrend, only suffering a minor correction in 2006, continued in the years that followed up until 2008 where the global financial meltdown happened; marking it as the longest running uptrend in KSE’s history. The peculiar part is that during those years Kuwait withstood: a major oil field explosion in 2001, a neighboring war in Iraq to oust Saddam Hussein in 2003, deadly gun battles between Islamist radicals and law forces in 2005, death of the Emir -Sheikh Jaber- resulting from brain hemorrhage in 2006, major political standoffs between the parliament and the government in 2007, and many other associated incidents.

Even though the effect that the previous incidents, and many other shortcomings, had on the overall social mood was nearly devastating; strangely enough, in that period the KSE index rose by more than an astonishing 1000%!

2009-Present

The Emir dissolved the parliament amid political tensions in March of 2008, still the index clocked a 2.2% increase in March alone. But when disinclination to co-operate with policymakers by members of the cabinet signaled that government-parliamentary tensions would be carried over to 2009. One would think that such tensions would be reflected on the financial market, yet the market was moving sideways post the steep decline in the second quarter of 2008. Giving no indication that these tensions have affected the market. Thus, giving more evidence that this fumbling and the adverse reflection it has on the social mood would not be a contributing factor in deciding which way the market goes.

The year 2010, excluding December which will be discussed separately later on, the parliament set forth a developmental plan to establish mega infrastructure projects to lift the country out of its prevailing despair . Subsequently, the index moved 20% on the downside, and then reversed to the upside in June inferring volatility totally unrelated to the happenings of the country and their implications on the social mood. However, right at the end of the year and onto 2011, the index was moving in a perpetual downtrend. It could be attributed to the sheer amount of demonstrations that happened throughout the year and the high-level corruption claims that were surfacing around which resulted in another dissolvent parliament. Nonetheless, shareholding companies were going bankrupt left and right, prominent investment companies declared losses of more than 75% of equity making the social mood less of a detriment in the direction of the index.

The years 2012 and 2013 were plagued with more parliament dissolutions, extremely low voting-turnout (due to boycott advocated by political activists and past PMs), mass arrests of citizens over accusations of insulting the Emir, Kuwait seems to have hit rock-bottom. Yet still, the index sprung back in an unforeseen uptrend, gaining back 30% of the losses accumulated in 2010 and 2011. With a fortified parliament ensuing a constitutional court ruling that would ensure that it continues the whole 4-year term, and honest action depicted in governmental actions this year, optimism is partially-regained. As yet, the KSE index has been moving sideways and could potentially enter a downtrend with no end in sight.

Conclusion

The Kuwait Stock Exchange Index proved to be an inefficient indicator of the social mood as implied by the previous findings, and vice versa, social mood could not predict the movement of the KSE Index. For people involved closely with the KSE, they know that the market does not rely on companies’ fundamentals as much as other developed markets around the world, and now it has been found that even social sentiment is not a deciding factor, leaving us with a big question mark as to what could be the real driver for the market. But, as far as a sociometer goes, thankfully there are social media platform applications (i.e. Twitter, Facebook…etc.) that are more readily available to help us in estimating social moods and behaviors.