Sector outlook 2008: Capital Markets

04 January 2008
As Saudi Arabia's Tadawul begins to recovery, plans to reformulate the market and introduce new products such as exchange-traded funds, and the increasing sophistication of market players, will help to modernise the region's largest stock exchange.

A queue of initial public offerings (IPOs) waiting to list will deepen and broaden the bourse. Pricing issues using a book-building process will be more common as established companies seek to realise their true value.

However, regulatory ambiguities over foreign investment in the bourse will persist. Foreigners may be able to invest in local IPOs through domestic mutual funds but local speculators will dominate the market in the absence of institutional investors.

Markets across the Gulf, particularly the Dubai Financial Market, will receive interest from institutional investors seeking to benefit from their lack of correlation with the global capital markets.

However, the bourses' isolation from international turmoil will diminish as emerging market fund managers take positions, furthering the region's connections with the rest of the world.

This year will be key for the Dubai International Financial Exchange (DIFX), with the finalisation of its parent company Borse Dubai's transaction with OMX and Nasdaq expected in the first quarter. In return for its holdings in the Nordic exchange, Borse Dubai will benefit from Nasdaq's financial investment in the DIFX, and branding.

Following its purchase of Nasdaq's 28 per cent stake in the London Stock Exchange, the DIFX is expected to continue to look for acquisition targets to raise its international profile.

More Dubai government entities will list on the DIFX, but whether there will be a flood of major listings is uncertain. The bourse will lead the way with the introduction of products new to the region, including derivatives and real estate and infrastructure investment trusts. The bourse is set to develop as the regional centre for sukuk (Islamic bond) listings.

Investment targets

The regional debt markets will deepen, with more corporate issuances from Dubai, including sukuk, and more in local currency to appeal to issuers and investors steering clear of dollar borrowing and assets.

With the full extent of the impact of the US mortgage crisis as yet unknown, private equity and sovereign wealth funds from the GCC are looking opportunistically for overseas investment targets among the wreckage of failing institutions.

More high-profile international acquisitions by regional buyers are expected, and competition between sovereign funds will accelerate with the emergence of Qatar Investment Authority and a more pro-active Abu Dhabi Investment Authority.

GCC private equity players active in inter-national merger and acquisition transactions are turning their attention to the Mena region. Investments are expected in sectors compatible with sharia-compliant investment criteria, such as infrastructure.

However, resistance from family businesses to sell off unprofitable subsidiaries will act as a break on the growth of private equity in the region.

While international institutional investors focus on the region, competition to service clients locally will intensify between asset managers and private banks. Institutions will increasingly feel the strain of rising set-up costs, including high rents and salaries. Margins could begin to shrink as companies seek to gain market share by underpricing.

TABLE: Major IPOs in 2008

ProjectClientDescription
ConglomerateAl-Qudra Holding ( Abu Dhabi)na
ConstructionNakheel (Dubai)na
Financial servicesEnmaa Bank (Saudi Arabia)IPO of 70% of shares
Financial servicesBank of Alexandria (Egypt)IPO of 15% of shares
Financial servicesNoor Islamic Bank (Syria)IPO of 51% of shares
Financial servicesTadawul (Saudi Arabia)na
Financial servicesSaudi Reinsurance Company (Saudi Arabia)IPO of 40% of shares
Financial servicesBank of Jordan-Syria (Syria)IPO of 35% of shares
Financial servicesPalestine Securities Exchange (West Bank and Gaza)IPO of 30% of shares
HealthcareSaudi German Hospitals (Saudi Arabia)na
IndustryAluminium BahrainIPO of 40% of shares
IndustrySaudi Arabian Mining Company (Maaden)IPO of 50% of shares
MediaShowtime (UAE)na
Oil and gasRAK Petroleum (UAE)na
PetrochemicalPetroRabigh (Saudi Arabia)IPO of 25% of shares
PetrochemicalRas TanurahIPO of 30% of shares
TelecommunicationsSaudi Mobile Telecommunications Company (Saudi Arabia)IPO of 40% of shares
TelecommunicationsEmirates Post (Dubai)IPO of 29% of shares
TelecommunicationsNawras (Oman)na
TourismAl-Tayyar Travel Group (Saudi Arabia)IPO of 30% of shares
TransportSaudi Arabian Airlines (Saudi Arabia)IPO of 30% of shares
TransportEmirates Airline (Dubai)na
Mergers and Acquisitions
Financial servicesBorse Dubai/Nasdaq/OMX dealBorse Dubai will exchange its stake in OMX in return for a 20 per cent stake in Nasdaq and Nasdaq’s investment in the Dubai International Financial Exchange
Regulation
Financial servicesDubai Financial Services Authoritycompleted review of its rule book

na=not available; IPO=initial public offering. Sources: MEED; Jadwa Investment; Zawya


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