Global : Corporate earnings failed to enthuse GCC markets

Published May 16th, 2006 - 08:48 GMT

Global Investment House – Kuwait – GCC Market Review – May 2006 – It was red splattered all over the GCC region as the markets continued to decline under the selling pressure. The biggest markets of the region, Saudi Arabia and UAE reported whopping monthly declines of 23.6% and 16.5% respectively. Barring Kuwait and Qatar, all the GCC market ended the month in the negative territory. It seems that even the initial reports of strong growth in the corporate earnings have failed to enthuse the investors who choose to remain on the sidelines.


At the end of April-06,the top-performers of 2005 (KSA, UAE & Qatar) reported YTD decline of more than 20%. In fact, only one market, Oman, still remains in black in terms of YTD growth showing the strong grip of bears on the GCC markets. But the downturn in the markets has provided silver lining as some of the stocks look very attractive at current levels. We believe that the trading activity is likely to pick up next month as the complete picture of corporate earnings emerges.


Table 01: Index Performances


Measured by


Index Close

MTD Growth (%)

YTD Growth (%)


Global Bahraini Stocks Index





Global General Index





MSM Index





Global DSM Index




Saudi Arabia

Tadawul Index





NBAD Index




Source: Respective Stock Exchanges and Global Research



Kuwait Stock Exchange - Measures to move towards efficient and transparent market

Capital market is one of the most vibrant sectors in the financial system, marking an important contribution to economic development. It is an important institution which moves savings into more efficient investments. Well functioning market ensures that both corporates and investors get or receive fair prices for their securities. This also ensures that valuable projects get financed. Efficient and transparent capital market would have two important effects. First, it would increase the quality of investments in the economy. Second,transparent capital market may facilitate increased foreign savings in the country to finance additional investments. The development of a sound capital market requires enhanced transparency, market discipline mechanisms, greater investor protection, strengthened legal and regulatory framework and desirability to introduce innovative financial instruments.


Kuwait’s savings rate is sufficiently high to support economic expansion. The faster development of Kuwait’s economy requires both progress on the policy front and innovative approaches to financing long-term investments. With regard to capital market, since 2001, the number of companies in Kuwait Stock Exchange almost doubled to 163 and its market capitalization witnessed a five fold jump to US$133bn. We believe that with this rapid growth in market activities there are certain measures which needs to be evolved for further and systematic growth of the capital market in Kuwait.

Required Measures:

1)Setting up of a Securities Market Regulatory Body: There is an utmost need on the part of the Government to set up Securities Market Regulatory Authority which should govern and regulate the functioning of the capital market. The regulatory authority should be responsible for a broad spectrum of regulations covering all the participants of the financial markets such as merchant bankers, lead managers, underwriters, stock brokers, asset managers, portfolio managers, etc. Apart from that regulatory authority should also issue detailed investors protection guidelines.

2) Corporate Governance: The exchange or the regulatory authority or the governing board of the Companies Law should issue detailed guidelines on corporate governance and should make it compulsory for all the listed companies to comply with these guidelines. At the same time it should be compulsory for all the listed companies to give a separate report in their Annual Reports on adoption of Corporate Governance Standards in the organization and its progress to comply with the available guidelines.

3) Increasing the Depth of the Secondary Market: Increasing the depth of the market is of utmost importance for institutional as well as retail investors. How can it be done?

i)By widening the basket of financial securities available for investors. This can be done by introducing new investment instruments such as various types of Debentures (convertible, non-convertible, partly convertible and optionally convertible), Convertible Warrants, Preference Shares, etc. Not only in Kuwait, in the entire region availability of direct investment instruments are limited only to equities and bonds. Therefore, corporates as well as stock exchanges should act together to explore different sources of raising funds. At the same time concerned authorities (stock exchange and regulatory body) should try to create awareness of such instruments among investors.

ii)By introducing new financial tools such as stock-splits, reducing the market lot of highly valued stocks, etc. All these will help to increase retail participation in the market and widen the investors base.

iii)It should also focus on further institutionalization of market by encouraging participation of Mutual Funds, Financial Institutions, FIIs, banks, etc.

iv)The Government should also unlock their holdings through privatization of the state owned enterprises in core and non-core areas. Apart from that, private business enterprises and family owned companies should also list themselves at the stock exchange. This will help broaden the sectoral choice for investors and will also attract many institutional investors (especially foreign investors) to the market.


4) Revival of Secondary Market:


i)Price bands should be reviewed. It should be based on the percent change in a day rather than absolute amount in fils.

ii)The listed securities should be dematerialized as it will lead to rapid and cost efficient execution of trades.

5) Raising of funds through IPOs of Equity shares:


i)The pricing of an IPO is a very important and crucial factor for both issuer as well as investors. Therefore, the exchange should have detailed guidelines for deciding pricing of an IPO, which is more important in the case of start-up companies. There are two ways through which companies can price their IPOs, Fixed Price Offering and Book Building Route.


Fixed Price Issues:

As the name suggests, the pricing of the issue is pre-determined and it has to be approved either by the regulatory body or by the respective stock exchanges where the company is listing its equity stocks.


Book Building Route:

Book Building is basically a capital issuance process used in IPO which aids price and demand discovery. It is a process used in public offers of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.


Out of the above mentioned two methods, we believe that book building is the ideal route to raise funds through primary market as it is based on price discovery.


ii)Primary market should be opened for expatriates by allowing them to invest in the IPOs, which will further widen the investor base.


iii)There has been a great time lag in listing of new companies, after raising funds through IPOs. Therefore, there has to be a specific time period and within that the company should get listed, otherwise stiff penalties should be imposed on such companies.


6) Investors Education: The exchange, regulatory body and capital market intermediaries such as investment companies or securities firms should conduct investors education program on a regular basis. Investors education program is a very useful tool during crisis in the market. It should be aimed to promote and regulate the securities market so as to establish a dynamic and efficient securities market contributing to the growth of the economy. Such programs should be structured keeping in mind the ordinary investors and should cover a broad spectrum of areas such as how to trade in the market, trading procedures, the functioning of the market, reading of financial statements of listed companies, creating awareness of various investment instruments, etc. The exchange can also publish educative materials. Apart from this, there has to be a separate `Investor Relations Department’, which  interacts with investors at regular time intervals and informs them about the sourcing of the information from the exchange and also updates them with new initiatives taken by the exchange.

7) Information on Listed Companies: Availability of information of listed companies is also very important. The exchange has to improve upon this as many areas have been ignored such as reporting of changes in shareholding pattern of listed companies, historical financial data (at least for past five years), etc.


Saudi stock market outlook.…

Saudi stock market, the biggest in the region has been battered recently and has seen selling activity not seen in years. The market at the end of April-2006 has reported YTD decline of 22% after its saw a massive sell-off in April wherein market went down by 23.6% in one-month. This is attributed to the investors’ sentiments going down on account of news of market manipulation and stretched valuations that led to both institutional as well retail investors starting to off-load their holding which turned into a surge of selling in April-06.


The Saudi market reported growth of 103.7% and84.7% in 2005 and 2004 respectively which was clearly much ahead of corporate earnings growth of 43.9% and 48.9% reported in the same periods. The market cap to GDP ratio at the end of 2005 was more than 200% which further increased till Feb-06, indicating stretched valuations. The market multiples were very high as compared to other regional markets and market participant were expecting some correction which did come in April-2006 when the stock market saw a steep sell-off.


We still believe that Saudi economy and market continue to enjoy high liquidity and this is evident from strong subscription levels in the primary market e.g. YANSAB IPO of 39mn shares was oversubscribed 2.8-times as it raised SR5.91bn where nearly half of the Saudi population participated in the IPO. According to reports, as many as 1.6mn people subscribed to the shares of Saudi Research & Marketing Group (SRMG) during its initial public offering (IPO) which was oversubscribed nearly four times. Primary market will be seeing a lot more action this year as many corporates and government undertakings have expressed intention to list which will increase the depth of the Saudi market.

With the recent correction in the market have come new regulatory developments with the regulators reducing the par value of shares from SR50 to SR10 which is expected to increase liquidity and entice retail investors. In another landmark decision, expatriates were allowed to invest directly in the stock markets. Earlier they could invest only through the fund route in Saudi equities. Also the Saudi Capital Market Authority (CMA) has acted tough and suspended two dealers for manipulating stocks of three companies. This is likely to send a strong signal to the speculators in the market and provide assurance to the investors that market regulator is keeping a close eye on the market developments.

We believe that these positive developments will enhance the liquidity and help in improving the profile of the capital market. We believe that the trading activity is likely to pick-up in the coming months as we get a broader picture of corporate earnings. However, the country seems to be on a strong footing as indicated by positive reports of the international rating agencies.

We also believe that the steep selling on the bourse has provided investors another opportunity to enter at current levels as select stocks present good investment opportunity. The reason for strong growth in the markets are still present in the form of high liquidity, strong macro-economic growth and strong corporate earnings growth. In our recently released “GCC Investment Strategy Report’ we have forecasted 32% growth in Saudi corporate earnings for 2006. We have also indicated the Saudi index target level at 17,515 points at the end of 2006 representing a growth of around 34% from current levels.

Market activity…..

The stock split ushered by the Omani and Saudi regulators had its effect on the total GCC trading activity as the volumes of shares traded on the GCC bourses touched 14.07bn shares in April-06. The overall negative sentiment prevailed on the market capitalization which ended the month at around US$930bn mainly due to 22% decline in the market capitalization of the largest bourse in the region, Saudi Arabia.







Table 02: Exchange Activity



Total Volume Traded

Total Value Traded (US$)

Market Cap (US$)

No. of Transactions





















Saudi Arabia










Source: Respective Stock Exchanges and Global Research


The GCC market breadth was heavily tilted towards the decliners as 304 stocks reported monthly declines as compared to 147 advancers. All the exchanges had negative advance decline ratio indicating the broad based selling in the region. Saudi stock market was totally under the grip of bears as it saw only 12 stocks reporting monthly gains as compared to 67 declining stocks. Even the Qatar and Kuwait markets, which ended the month in black had adverse advance-decline ratios.


Table 03: Market Breadth

































































Source: Respective Stock Exchanges and Global Research




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