Capital markets

The GCC bourses alone have lost $65bn in market capitalisation falling to reach $714bn

Source: MEED

The region’s capital markets were looking forward to a positive year in 2011. There were predictions of strong growth and improved liquidity, but the political unrest across the Middle East and North Africa (Mena) region, combined with the Eurozone debt crisis, created a bleak trading environment for almost all the bourses.

Activity had been picking up in early January, before demonstrations spread from Tunisia to Egypt and beyond and the markets quickly began to collapse.

Since December 2010, the Mena stock exchanges have lost about $100bn in market capitalisation, according to Majdi Gharzeddeene, head of investment research at Kuwait’s Kipco Asset Management Company (Kamco).

“[This is mainly] due to a lack of investor confidence, flight of capital and bearish market sentiment that pushed trading activities to its lowest level,” he says.

As of 17 November, the combined market capitalisation of the Mena bourses was $856bn. The GCC bourses alone have lost $65bn in market capitalisation falling to $714bn.

Downgrade impact

Regional markets have been directly affected by the European and US debt issues. They were the first to feel the blow of the US sovereign credit rating downgrade by ratings agency Standard & Poor’s from AAA to AA+ on 6 August. All of the region’s bourses, with the exception of Tunisia, fell as a result.

The worst hit were Egypt, Saudi Arabia and Dubai. The Egypt Exchange fell by 4.1 per cent, Saudi Arabia’s Tadawul dropped 4.9 per cent and the Dubai Financial Market slid 2.2 per cent.

The downgrade underlined the exposure the region has to global financial markets. “High volatility in the international financial markets, debt strains and a severe confidence crisis in Europe … have been fuelling volatility and instability in the bourses since the beginning of the year and weighing down on market sentiment,” says Gharzeddeene.

The biggest IPOs next year will be in Iraq, with the three telecoms operators preparing to list on the stock exchange

The Egyptian Exchange has been the worst-performing bourse in the region. Since the beginning of the year, it has fallen by about 42 per cent, losing $20bn from its market capitalisation. Following the fall of the Mubarak regime, investors started channelling their money into safer investments.

Saudi Arabia’s Tadawul, the region’s largest bourse, has fallen about 6 per cent since the beginning of the year and has lost $25.5bn in market capitalisation. The benchmark tumbled to its lowest level in the first week of March, hitting 5,323.27 points, due to fears that an uprising would take place in the country. However, a hardline response from the authorities diminished the possibility of a revolution and the Tadawul rebounded.

Elsewhere, the Kuwait Stock Exchange (KSE) has declined 16 per cent since the start of the year and has lost $23bn in market capitalisation. This is partly due to the regional political unrest and the contagion effects of the European debt crisis, but also because of internal problems within the country’s capital markets. Kuwait is still in the process of establishing a regulatory body and while it addresses these challenges the bourse is unlikely to grow.

Tainted image for Bahrain bourse

Bahrain’s main index has dropped by about 18 per cent since the beginning of the year. The unrest in the country and the king’s heavy-handed response to protests shattered Bahrain’s image as a safe-haven for foreign investment in the region.

The negative trading sentiment has resulted in a slowdown in initial public offerings (IPOs) in the Mena region this year. But the outlook for next year is brighter. Analysts are forecasting a pick-up in activity and the exchanges themselves are working hard to restore investor confidence.

“There has not been much happening, certainly from an equity basis,” says Steve Drake, head of capital markets at the UK’s PricewaterhouseCoopers. “We expect Saudi Arabia and the UAE to turn around and [anticipate seeing] more IPO activity. We will also see regional offerings outside the region, largely in London, although we have also seen interest in Hong Kong and Singapore.”

Some of the bourses have been encouraging family-owned enterprises to float shares in order to boost liquidity. The Muscat Securities Market (MSM) is partnering with Turkey’s Istanbul Stock Exchange to formulate a strategy to help convince family businesses to list. According to MSM, many family-owned enterprises have already shown an interest.

The biggest IPOs next year will be in Iraq, with the three telecoms operators preparing to list on the Iraq Stock Exchange (ISX). Asiacell, one of the mobile operators, is set to float in February and its IPO is expected to be worth $2bn. The other two operators will also be listing next year and their valuations are likely to be similar.

There are still concerns over whether the ISX will be able to handle such large flotations within close proximity to one another. But the ISX is adamant it can cope and the listings will only help to grow the bourse and boost liquidity.

The ISX has been the best-performing bourse this year, mainly due to its insular nature and lack of exposure to global markets. It is still in an early development phase, with daily turnover averaging $2-3m. Its market capitalisation is currently $4m, but this is forecast to double once the three telecoms operators have listed on the exchange.

The Palestine Exchange is another bourse that has fared well over the year. Like Iraq, the institution is no stranger to political turmoil and a breakdown in security. It continues to seek frontier status with the index compiler MSCI and has embarked on several road shows to drum up interest.

There is increasing hope for the Tunisian bourse as the country appears to be moving towards political stability. If the new government and parliament are able to create a sustainable economic environment to attract investors back into the country, the bourse will benefit.

Compared with Egypt, the Tunindex, the market’s benchmark, has not performed too badly, falling about 7 per cent since the start of the year.

The UAE and Qatar are also seeking an upgrade with the MSCI to emerging market status. A decision was postponed until December to give investors in the UAE the chance to adjust to the new processes in place and to give Qatar time to amend its foreign ownership laws, currently limited to 25 per cent. While many feel the UAE will be upgraded, there is less optimism about Qatar’s chances.

“We think it would be positive if it were upgraded, but on balance we think it is unlikely,” says David von Simson, chairman of the Qatar Investment Fund. “We suspect the foreign ownership laws will not be relaxed in time for December.”

An upgrade to emerging market status would bring further investment into the region and help boost the performance of the two bourses, but it is unlikely to be enough to counter the global economic issues that will continue to affect the region in the new year.

Possible recovery

“Recurring European debt issues, a deteriorating sovereign credit profile within the Eurozone and sluggish global economic growth along with volatility in capital markets and political instability in the Mena region are the main themes that will persist throughout the first half of 2012,” says Gharzeddeene.

Nonetheless, he predicts a recovery may start in the second half of 2012. This, he says, would depend on a gradual revival in credit markets, healthy corporate earnings and the stabilisation of the region’s political situation.

As the year draws to a close, however, none of these looks entirely certain.