LONDON, 14 February 2005 — Reports that the National Commercial Bank (NCB), the largest capitalized bank in Saudi Arabia, and the newly-incorporated Islamic bank, Al-Bilad Bank, are to launch initial public offerings (IPO) soon, has given a major fillip to an already buoyant GCC stock markets.
The markets witnessed strong growth in terms of volumes and values of shares traded with the UAE and Qatar particularly performing strongly. The Tadawul Stock Exchange in Saudi Arabia reported its first monthly decline for the year in December 2004. However, the overall bullish trend continued into the New Year.
The Kuwait Stock Exchange, for instance, was up on the month by 97.2 percent in January 2005 although market activity in terms of the volume of shares, the value of shares, and the number of transactions were down on average by over 30 percent compared with December 2004. The main reason for the decreased activity is the effect of the New Year and the Haj holiday break.
The markets are of course awaiting corporate results especially 2004 financials. Judging by the early bird announcements, 2004 is set to be another bumper year for the GCC corporate sector, especially the oil and gas, and banking. Analysts at Global Research, the research arm of Global Investment House in Kuwait, in the latest GCC market review are confident that the markets are expecting another round of strong earnings. “This combined with strong macroeconomic performance in the wake of high oil revenues and strong liquidity,” stresses Global Research, “can provide momentum for another rally in the markets.”
NCB, for instance, recently announced net profits of SR3.53 billion in 2004, an increase of SR518 million compared to 2003. Other GCC corporates such as Gulf Finance House in Bahrain; and Saudi Basic Industries Corporation (SABIC), have similarly announced strong increases in profitability for the same period.
The primary market, in particular, is expectant with the slate of new issues to be launched in 2005, which is bound to have a positive effect on the secondary market in terms of market depth and a rise in trading volumes.
NCB, reportedly is planning to sell between 30 to 40 percent of its shares owned by the state entity, the Public Investment Fund (PIF). The fund is the single largest shareholder in NCB with 69.3 percent of the equity.
Similarly Al-Bilad Bank, incorporated in November 2004, plans to launch an IPO on Feb. 21 through to March 9 offering 30 million shares worth SR1.5 billion ($400 million) for sale. This represents half the new bank’s capital.
Market capitalization in the six GCC markets increased from $120 billion in 2000 to $522 billion in 2004. The aggregate volume of shares traded similarly increased from 7.9 billion to 50.9 billion in the same period, with the cumulative value of the shares increasing from $22.9 billion to $551.9 billion respectively.
It is also true that the strong GCC economies have contributed to market sentiments. But to what extent this is due to the overriding impact of higher oil prices than structural reforms and the success of economic diversification policies depends on the quality of information and data available.
A lack of transparency; lack of reliable corporate information; lack of regulatory oversight especially on issues such as insider trading; and lack of an aggressive enforcement culture, may undermine the spectacular growth and success of the GCC capital markets of recent years. The issue of gearing — borrowing funds to invest in stock markets; the quality of the companies put forward for flotation; and the cyclical nature of economic sectors such as real estate, to which the Gulf markets are heavily over-exposed to at the moment, could precipitate future problems. In the real estate sector, for instance, a market correction is predicted. Some bankers say a correction of up to 20 percent is realistic; while others fear a “bubble economy” effect.
Global Research rightly “expects increased activity as the family businesses and the governments of the region tap the primary market to unlock the value of their investments. This will also improve the performance of the secondary markets in terms of increase in the trading activity especially by retail investors.”
Global Research also envisages an increasing trend toward cross listings of companies from the GCC companies which will pave the way for regionalization of the stock markets. This may be too optimistic, given that the number of cross listings have been few and that its momentum has tended to be undermined by the painfully slow pace at which individual GCC markets have been opened to entities from member countries. This is particularly true in the financial services sector, mainly banking, insurance, and financial consultancy.
In some respects the GCC capital markets are not natural markets as in a true market economy sense. There are still too many constraints in terms of market access, for instance, for expatriates and foreigners. Countries such as Saudi Arabia, Bahrain, Qatar and Kuwait are opening up, but capital markets access remains restrictive. In many cases even fellow GCC citizens are barred from participating in IPOs and other offerings.
An effective cross listings will only work if you have a level playing field in market access, regulation, monitoring and enforcement. And the best way to effect this, stress analysts, is for the GCC to forge a Gulf regional capital markets framework and infrastructure.
The individual markets are too small in international terms compared with New York, London, Tokyo and so on. As such, a regional capital market, with a unified regulatory, supervisory, enforcement, compliance and transparency framework and rules, is bound to create depth both in primary and secondary trading and could best serve the rigors and demands of a truly liberalized capital markets culture.
