Kuwait bourse set for major reforms

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Improving liquidity and boosting market capitalisation are the focus of reforms under way at the Kuwait Stock Exchange (KSE), as the authorities work to reinvigorate the bourse’s growth.

The authorities have already begun work on a raft of technical reforms. While gaining emerging market status on internationally traded indexes forms a key part of their long-term agenda, other proposals, including a public offer of a minority stake in the KSE and the listing of state-owned oil companies, are also being considered.

Pattern of delistings

As of late September, some 24 firms had announced plans to delist from the KSE since the start of 2014, according to media reports. Bahrain’s Gulf Finance House featured among those opting to cease trading, after its board approved a voluntary delisting.

The KSE delisted an additional five companies over the period as a result of lengthy share suspensions or accumulated losses exceeding 75% of their total capital. Only two new companies – telecoms operator VIVA Kuwait and Mezzan Holding – listed on the bourse during this time.

Sheikh Talal Ali Al Abdullah Al Jaber Al Sabah, CEO of Al Nawadi Holding – one of the companies that announced plans to delist this year – told media in September, “The main reason for the withdrawal is the low market value of the shares.” Low turnover has also been cited by delisting firms, with the daily trading volumes on the KSE often half the levels seen in Saudi Arabia and Dubai.

This stands in contrast to many other markets in the region. Nine companies listed on the Saudi Arabian exchange over the same period, while the Dubai Financial Market (DFM) and NASDAQ Dubai together saw seven new market entrants.

Underperformance an issue

Trading volumes on the KSE were in decline throughout 2014, falling by 58% over the course of the year, while the total value of traded shares dropped by 46% to KD6.2bn ($20.5bn). The bourse’s market capitalisation, meanwhile, declined by 45.5% over the period to KD30.2bn ($99.9bn), according to KSE data.

These figures have largely continued their downward trend in 2015. While the number of shares traded rose by 3% during the first half of the year, as per official figures, their total value fell by 12% to KD2.4bn ($7.9bn). The value of traded shares was down again in the third quarter, falling by 29% to KD774.1m ($2.6bn).

Companies report that in addition to a lack of liquidity on the KSE, shares are often undervalued.

Their concerns are supported by mid-year data from the National Bank of Kuwait, which showed the aggregate profits of the 169 companies listed on the KSE rose by 5.6% year-on-year to reach KD868m ($2.9bn), driven by the real estate and financial services sectors. Meanwhile, during the same period, the KSE’s total market capitalisation fell by 6.6% to KD29.2bn ($96.6bn).

Reforms target revival

With regional stakeholders voicing concerns about the impact of delistings from the KSE on the attractiveness of future initial public offerings, the Kuwaiti authorities are expected to introduce a series of reforms in the coming months aimed at stabilising the bourse and, in a longer-term view, eventually achieving emerging market classification.

While Kuwait has yet to gain a place on the Morgan Stanley Capital International (MSCI) list of markets under consideration for emerging market status, meaning that an upgrade is unlikely before 2017 at the very earliest, the Capital Markets Authority (CMA) is working on technical improvements that it hopes will strengthen the market’s long-term candidacy.

The authority’s drive includes bringing settlement of trades more in line with global norms and a potential privatisation of the KSE itself, which the government has said could involve offering up to 44% of KSE shares to a firm specialising in operating exchanges.

In September Nayef Al Hajraf, chairman of the CMA, told media that the government was also considering listing state-owned oil companies, which could offer a boost to both market liquidity and capitalisation.

Regional benchmarks

Other bourses in the region, including the Qatar Stock Exchange (QSE) and the DFM, have seen significant increases in trading activity following the reclassifications of Qatar and the UAE by the MSCI and others, though the institutional investor inflows the reclassifications were expected to herald have not fully materialised.

In September the FTSE Global Equity Index Series upgraded the QSE from frontier to secondary emerging market status, after similar upgrades from MSCI and Standard & Poor’s last year.

Average daily turnover on the QSE rose 160% year-on-year (y-o-y) in the wake of the MSCI upgrade, according to the exchange’s CEO, Rashid bin Ali Al Mansoori, with total market capitalisation up 21.8% in 2014 at QR676.8bn ($185.9bn). On the first day of trading following the country’s inclusion in the MSCI Emerging Markets index, shares traded on the QSE reached a record QR4.6bn ($1.3bn), according to the bourse’s annual report, compared to a previous high of QR2.4bn ($659.3m) in June 2008.

For its part, the DFM’s benchmark index was up 58% year-to-date in May 2014 on news of the UAE’s reclassification by the MSCI, with average daily trading rising by 136.7% over the course of the year. The bourse’s market capitalisation reached Dh322.6bn ($87.7bn) by year’s end, for a 24.3% gain.

However, the anticipated portfolio flows from global institutional investors have not materialised to the degree markets had hoped, with sluggish global growth and the expected interest rate hike in the US keeping many investors bearish on emerging markets. 

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