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Well Stocked
Luiza Karim looks back on the past year's activities in the Gulf and Middle East's stock markets Investors considering Middle Eastern markets frequently cite low liquidity and the consequent risk of being unable to sell up. The Saudi and Egyptian markets have often resembled static ownership registries rather than dynamic trading centres. Smaller markets have turned to cross-listing arrangements with little effect so far (Oman with Bahrain, the UAE with Qatar, and Kuwait with Saudi Arabia, Egypt, Jordan and Lebanon). Higher oil prices have so far had only a modest impact on Gulf markets, which are still partly closed to foreign investors. In the absence of more diverse supply and greater liquidity, international investors are reluctant to invest, and new issues will be discouraged. However, there are plenty of companies in the region seeking to raise equity capital within the next few months but it does not help that the range of traded stocks is often inadequate. Egypt, regarded as a safe haven during the emerging markets crises of 1997-98, has fallen since a brief early-year rally, hit by higher interest rates and currency concerns. Cairo has often been a one-stock show this year, with the mobile phone operator MobiNil accounting for up to 50 per cent of trading in many sessions and often saving the market from an even worse performance. Several Egyptian companies have managed to raise capital this year - Orascom Construction, Al-Ezz (steel), Chipsy (food) and Lakah (pharmaceuticals) - but others like Orascom Technologies/Hotels are biding their time. Privatisation offerings have been delayed in both countries. In the case of Lebanon, the one-stock show has been led by Lebanese land developer Solidere. In a post-boom climate, the company has led this year's collapse in one on the region's newest and smallest stock exchanges. Upcoming offerings in the UAE include basic industries corporation Sina'at al-Emarat and the Emirates Global Capital Corporation, developer of the Saadiyat Island scheme. Kuwaiti conglomerate National Industries Group and Oman's Bank Muscat International are also planning to sell shares. All these offers will have a GDR component, that means the stock will be listed on developed markets, in a bid to reach more investors and bypass the shortcomings of the local markets. Upturn some way off Middle Eastern equity markets were due for a cyclical upturn in 1999. Israel and Turkey did on the whole oblige. These exchanges are among the most integrated with world markets and have recovered well from last year's Russia crisis. By contrast, Egyptian and Jordanian stocks have failed to perform. The on-again-off-again peace process has done little to improve the situation against the backdrop of a much slower economy. For the more-inward looking markets of the Gulf, more concerned last year by the low oil price than by Asian or Russian fallout, recovery has taken its time. Saudi Arabia's NCFEI index is up around 19 per cent year-to-date, and Oman's MSM index has fared even better, yet neither market has regained its end-1997 level. Saudi American Bank is planning to merge with privately held United Saudi bank to create Saudi Arabia's second largest bank. The Arab Investment Group is expanding its investment portfolio in the region by bidding a 40 per cent stake in Jordan telecommunications Company. The Government of Saudi Arabia has hired Morgan Stanley to advise on options for foreign investment in the energy sector. Other Gulf markets remain flat. Henry Azzam of the Middle East Capital Group in Beirut is confident that the upward cycle will become more apparent in the Arab markets in the months ahead. Any general upturn should be supported by gradual improvements in technology, settlement terms, transparency, regulation and flow of information. In addition, Gulf rulers in parallel with their other structural reforms, are warming to equity investments from outside the GCC. It is a chicken and egg situation. In the absence of fresh funds, liquidity cannot increase, and company owners will be reluctant to float fresh stock. That includes the officials responsible for substantial privatisation programmes in almost every country in the region. Despite feverish retail trading, even Istanbul saw no public offerings between May and September, as the latest batch of small and medium sized companies and real estate funds awaited better market conditions. Oman and Bahrain Oman has led the way in opening its market to international investors, followed by Bahrain, which allowed foreigners to invest in public sector as well as private sector companies in March. Muscat and Manama were awarded with a place in the Washington-based International Finance Corporation (IFC) and have been added to its daily indices of emerging stock markets which measures performance of the most active stocks on local stock exchanges. However, company ownership ceilings still apply. The National Bank of Bahrain has reported a net profit of BD 12.5 million for the first nine months of 1999, an increase of 2.7 per cent over the corresponding period last year. Fortunes of the Oman stock market (MSM) have taken a setback due to the Central Bank's decision to set a 13 per cent ceiling on interest rates on personal loans. This has badly affected banking and investment company shares and will have severe repercussions on the profitability of the banks in the future and most of the companies in the market are linked one way or another to the banking sector. The banking and investment sector accounts for more than 60 per cent of the trading value in MSM. National Bank of Oman released its third quarter results for 1999. Net profit increased by 31 per cent to RO 15.43 million at the end of September 1999 from RO 11.79 million in the corresponding period for the year before. Foreign investment Kuwait and Qatar are drafting laws that will allow foreign investment via the stock exchange. Qatar effectively allowed foreign participation in its bourse for the first time in last December's Q-Tel offering. Qatar's Doha Securities Market has signed a deal with Anderson Consulting to provide shareholder information and other relevant data to listed companies through a remote access service. The new facility will help the stock exchange to reduce costs and provide it with Internet presence as well as an entry into e-commerce. The system, about to be implemented, is seen as the first step towards on-line trading. However, access for outsiders to the Saudi and Kuwaiti stock exchanges and the UAE over-the-counter market is limited to a few investment funds. There is, of course, no shortage of local investors in the Gulf. But small investor confidence has been battered in the past as bandwagons mounted by unsophisticated, often loan-financed retail investors give way to bursting bubbles. As for large investors, they are more likely to invest directly or simply place their funds in the endless diversity of world markets. Officially UAE The draft of the long-awaited UAE stock market law was passed but despite talk of the stock market law having been approved by the federal cabinet, UAE shares remained relatively quiet. Most share prices in the UAE have remained below their levels at the start of the year despite the recent rally and the passing of a draft law. Poor volumes and lack of liquidity are having an adverse effect on the UAE unofficial stock market. The active shares in the market are Emirates Telecommunications (Etisalat), Emaar Properties, and Emirates bank International. Called the Dubai Financial Market, it is scheduled to open on UAE National Day December 2 and is likely to have two trading floors. The official financial market will impose transparency and reduce kerbside dealing. A spokesman for a Dubai-based securities firm welcomed the news but felt it could still be some time before on-line trading gets underway. "The market is not exactly booming right now and it would be nothing short of a gamble to go on-line on UAE National Day. Should market listlessness persist during the holy month of Ramadan, it could undermine investor confidence," he pointed out. Analysts also pointed out that a number of steps have yet to be taken with the apex regulatory body having to be constituted and the Dubai Financial Market - and possibly others - having to be formally authorised to conduct trading. Brokers and other market members have only been accorded hands-on trading experience on the Canadian system, but it did not automatically follow that they would gain market membership. The authorities still have to licence those who can participate in the market, and all this could still take some time. However, if electronic trading is to commence, sufficient time should be given to test the system. Kuwaiti traumas The KSE has been hovering around all-time lows in recent months, almost 50 per cent down from its record levels of two years ago. Some 80 companies with a market capitalisation of above $20 billion are listed on the KSE, the second largest stock market in the Arab world after Saudi Arabia. Despite the improved economic indicators, Kuwait shares fell further to a record low of 1475, almost 7 per cent down this year. The bearish trend prevailing in the market is attributed to the lack of confidence in the market to investors, concerns over political uncertainty and rumours of financial irregularities within some major quoted firms. The performance of the KSE during the first 9 months of this year was terrible, when compared to the same period last year. The value of traded shares reached about KD 1,6 billion ($5.3 billion), a sharp decrease of 44.3 per cent than the traded value of the same period in 1998 of KD 2,89 billion. The traded value of the current year represents 21 per cent of the GDP at current prices for 1998. The National Bank of Kuwait has stated that the recovery in oil prices and budgetary finances has yet to spread to the rest of the economy. Kuwait's central bank governor has insisted that it was not his job to intervene to help bolster the flagging Kuwait Stock Exchange (KSE) . The central bank is only a financial advisor to the government and not a decision-maker on moves to boost trading, Sheikh Salem Abdulaziz Al Sabah. Sheikh Salem also dismissed charges that the KSE was suffering from a liquidity problem as baseless and untrue, saying dealers on the market had not even reached the ceiling of credit facilities offered to them by banks. "Kuwait's banking and financial sectors are very strong, and recent international economic studies have commended the monetary stability that Kuwait enjoys," he said. Economists have sided with the central bank governor's previous warnings that intervention through stock-buying could lead to a total collapse of the KSE on the back of artificial price-raising. Some economists remain confident that the market will pick up on the strength of underpriced stocks as well as a state economy revitalised by a surge in oil prices and preparing for a degree of liberalisation. Kuwait's parliament is due in the weeks ahead to discuss a series of laws opening the Gulf state to direct foreign investment and foreign share ownership, and encouraging the role of the private sector.
* to 06/10/99 Source: MEEDMoney
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