GCC gets back to respectability

24 March 2006
GCC stock markets rallied in the third week of March, following 'Black Tuesday' the previous week. However, the repercussions continued to be felt, as debate intensified on regulatory change and governments' role in protecting investors. Changes have already been announced in Saudi Arabia and the UAE, the two most overheated markets and the ones that suffered most in the recent slump.

The Shuaa GCC index rose by 6.3 per cent in the week to 22 March, led by recoveries on the Dubai Financial Market (DFM) and the Tadawul All-Share Index (TASI). The Shuaa UAE index climbed by 14.5 per cent over the course of the week and the TASI by 12.8 per cent. The Kuwait Stock Exchange (KSE) continued falling for longer than the other main regional bourses, but recovered on 22 March. Both the KSE and the Doha Securities Market rose by about 4.5 per cent during the week.

The Saudi turnaround began when Prince Alwaleed bin Talal announced that his Kingdom Holding Company would inject up to SR 10,000 million ($2,667 million) into the market. The investment has yet to take place, but the statement of confidence in the market's future performance provided some reassurance to investors - crucially, since the downturn was driven by a sudden shift in sentiment rather than fundamentals.

In a sign of the high-level political concern at falling stock prices, King Abdullah stepped in on 15 March. He ordered Finance Minister Ibrahim Abdulaziz al-Assaf to study measures to allow foreign residents to trade directly on the market, rather than through mutual funds, and to reduce the nominal value of shares. Action was swift. Shortly afterwards, the Capital Market Authority announced a five-fold split in the value of listed companies' shares to SR 10 ($2.70) from SR 50 ($13.30), subject to government approval, and said that the TASI would be open to expatriates living in the kingdom from 25 March.

'Both of these are sensible moves,' says one analyst. 'The share split will improve liquidity and trading volumes, and will psychologically make shares feel cheaper. And opening the market sends a wider signal of growing economic liberalisation.' However, some market-watchers warned that the move was too hurried, and many also doubt the level of likely interest given continued high valuations. As elsewhere in the region, falling prices have prompted a flight to quality and a move away from speculative stocks. Saudi Basic Industries Corporation (Sabic), Saudi Electricity and Saudi Telecom Company have all seen their share prices rise by close to the much-maligned new daily limit of 5 per cent.

The UAE bourses, in particular the DFM, have remained more volatile since the slump but are up overall. Increased liquidity should return to the market following the close of the Tamweel and du initial public offerings (IPOs) in early March. The former was nearly 400 times oversubscribed and the latter 167 times, indicating no general loss of enthusiasm among investors for stock market activity.

As in Saudi Arabia, the authorities in the UAE moved quickly to stimulate the secondary market. The government ordered companies to refund excess oversubscriptions from IPOs within two weeks of the offering's closure and indicated that they would enforce sequencing of both IPOs and rights issues, both measures designed to minimise sharp fluctuations in market liquidity. And the DFM on 21 March also announced a new system designed to reduce price volatility. Under the system, companies' shares will be categorised as either 'more active' or 'less active' according to various criteria, and allowed accordingly a maximum daily fluctuation of either 15 per cent or 5 per cent.

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