Bouncing back: After five years of decline, there are signs that the market may be set for an uptick

After the rough and tumble of the last few years, Jor-dan’s capital markets are now at a potential turning point. There are some significant signs that the mar-ket is returning to more realistic levels. Meanwhile, sector players are pressing for regulators and gov-ernment actors to open the way for a more diverse product range, via a wider bond and Islamic bond (sukuk) market, while encouraging businesses to look to the capital markets for financing. Challenges remain in a region beset by political volatility at a time of global market uncertainty. Boost-ing liquidity in the capital markets remains a major objective, as too often the macroeconomic environ-ment leads investors to look away from the capital markets in search of higher returns. Yet the challenges also create opportunities. Many see Jordanian stocks as generally undervalued, from the blue chips to even some of the penny stocks. Prof-itability is also on the up and the Amman Stock Exchange (ASE) has made many structural improve-ments in recent times, creating a trading platform more appropriate for one of the oldest and most dis-tinguished exchanges in the Middle East. Many investors are thus highly optimistic that 2013 could be a decisive turning point for the bourse.

SEPARATION OF POWERS: The ASE was established in 1999 as one of three entities springing from the former Amman Financial Market (AFM). The AFM was set up in 1976 and began trading in 1978. Prior to that, there had been an extensive, if unorganised, cap-ital market in the country, with the first publically trad-ed shares dating back to 1930. The AFM’s dissolution was a result of the growing maturity of the market and the need for a separa-tion of powers if it was to move forward. The Tem-porary Securities Law No. 23 of 1997 split the AFM into the ASE, the Jordan Securities Commission (JSC) and the Securities Depository Centre (SDC). The ASE is a non-profit organisation with financial and administrative autonomy from the state – although it is not yet a privatised body – and is man-aged by the private sector. It is managed by a CEO, a position that was vacant as of June 2013, with the acting CEO now the former deputy CEO, Nader Azar. Until 2002 the ASE was the sole stock exchange in Jordan authorised to trade. That year, however, Secu-rities Law No. 76 was passed, allowing the creation of other exchanges, although to date the ASE remains the only exchange in operation.

MARKET SUPERVISOR: The JSC has responsibility for supervising the issuance and dealing of securi-ties, with a regulation and monitoring role built in. While directly connected to the office of the prime minister, it is also a financially and administratively independent body, headed by a five-member Board of Commissioners appointed by the Council of Min-isters on the prime minister’s recommendation.

The JSC is also tasked with writing new legislation and regulations concerning the capital markets and issuing instructions to the ASE and SDC. In addition, the JSC issues licences to capital markets brokers and companies, registers securities and mutual funds, and performs all the other tasks of a contemporary market supervisor and regulator.

The SDC is a third non-profit entity, charged with ensuring safe custody, registering and transferring ownership of securities, and settling prices between brokers. Thus the 1997 law separated the functions of regulating from trading, in accordance with inter-national standards. There has recently been discus-sion over the future privatisation of the exchange too, turning it away from its current non-profit status, with some keen to follow the example of other glob-al exchanges in this. Yet a prevailing view also exists that the market must develop further before reach-ing this stage. The debate looks set to continue, with the ultimate decision likely to be taken by politicians.

CHANGES: The ASE has been continuously evolving since its establishment, with 2012 seeing important changes in how the market is organised. Chief among these was the creation of a third market. This estab-lished a three-tier ranking of companies, from the highest performers on the first market to the lowest on the third market. The move has been widely wel-comed, with the reorganisation expected to assist investors in identifying the general status of a par-ticular company straight away.

TIERS: To be listed on the first market, companies must now post positive earnings before tax for two consecutive years out of the last three, at a minimum rate of 5% of capital, and new entrants must have already spent one year on the second market. First market companies’ equity cannot be less than their paid-up capital, which must be at least JD5m ($7.03m), with a free float that is not less than 10% for any com-pany with paid-up capital of less than JD50m ($70.3m). Such outfits must also have at least 100 sharehold-ers. After the new rules were applied, the number of companies on the first market stood at 55.

On the second market, the rules are a little less strin-gent. Their equity must not be less than 50% of paid-up capital, with a free float of at least 5%, if paid-up capital is up to JD10m ($14.1m). New entrants must have spent at least one year as a stock on the third market. The second market also acts as an initial address for new companies being listed, prior to accession to the first market. After the rule change, the second market had a total of 149 companies.

Those companies that do not meet either the first or second market criteria can now list on the third market. Companies that had failed to make a full dis-closure of their financials for 2011 at the time the new regulations came into force were also placed on this market. After the latter group made this disclo-sure, 39 companies were listed on the third market.

LISTINGS: Thus, the ASE currently has a total of 243 companies listed, which, although down on the 2011 figure of 247 due to four de-listings, still makes it one of the most populous exchanges in the MENA region. This is largely the result of a boom in listings prior to the global financial downturn, when the ASE was highly successful in bringing new companies to mar-ket, as well as widening and deepening the exchange.

The new rules also include daily limits on stock price volatility, with the first market allowed to see movements of up to 7.5%, up or down, while the sec-ond and third markets are allowed a plus or minus 5% fluctuation. The hours of business for the third market are also quite different. Pre-opening is only from 9.45am to 9.50am, followed by just 20 minutes of continuous trading, until 10.10am. A follow-up pre-closing takes the third market to full closure at 10.15am. Following that, the market reopens for block deals only at 12.50pm.

In 2012 the ASE concluded an important interna-tional tie-in through signing a memorandum of under-standing with the Cyprus Stock Exchange. It is also a member of the World Federation of Exchanges, the Federation of Euro-Asian Stock Exchanges as well as the International Organisation of Securities Com-missions, among other bourse-related organisations.

MARKET PERFORMANCE: Few would dispute that 2012 was not a banner year for the ASE, or indeed for equities in general. Jordan was affected by polit-ical and economic uncertainty, as several of its neigh-bours continued to experience conflict or unrest. At the same time, the European and US downturn was still affecting global markets and depressing the appetite for risk more generally. Jordan itself had a period of uncertainty in its economic outlook, as Egyptian gas supplies, which are vital to its electric-ity industry, were interrupted. The major influx of refugees from Syria did not add greatly to invest-ment inflows, in contrast to the wave of Iraqi refugees that followed the 2003 US-led invasion.

Meanwhile, the government sought to rein in the budget deficit by rolling back subsidies. High inter-est rates, a consequence of government borrowing to cover the deficit and low foreign exchange reserves at the central bank, meant that the stock market lost some of its allure for investors, who saw higher returns in short-term Treasury bills (T-bills), certificates of deposit and bank deposits. At the same time, there were ongoing effects from a previous loss of confi-dence in the stock market, particularly by the banks.

BUILDING UP: From 2003 to 2008 the market had been characterised by bullish behaviour, with banks lending to brokers and individuals to finance the pur-chase of securities. A run of successful initial public offerings of major companies – which was part of the government’s privatisation campaign – added to the market euphoria then, with the ASE also attract-ing a significant amount of speculative foreign funds.

All of these events left some investors badly exposed when the slowdown hit. In 2009 global com-modity prices began to slide on the back of world-wide recession, negatively affecting the Jordanian economy and the exchange’s blue-chip commodity companies. Others made losses on hedging contracts and margin trading. Banks saw their non-perform-ing loan ratios growing, giving rise to concerns about their profitability. Thus, recent times have seen a marked reluctance by many banks to lend to equi-ties market players, leading to some of the liquidity difficulties the ASE is still experiencing.

Despite the challenges, it appears these concerns may now largely be a thing of the past. Aram Raba-di, the head of research at AB Invest, a local invest-ment firm, told OBG, “In 2013 the market enjoyed its best start in five years. The gains were widespread, but the financial sector led the way with an 8% gain, thanks to the amazing performance of the diversi-fied financial and real estate sectors.”

SECTORS & SUB-SECTORS: The ASE is divided into three main classifications of company – financial, industrial and services – with each breaking down into a number of sub-sectors. According to the ASE, in December 2012 the financial sector had a combined market capitalisation (mcap) of JD9.58bn ($13.5bn), of which banking accounted for JD8.35bn ($11.7bn). Industrials were the second-largest slice, with a total of JD6.16bn ($8.7bn), with mining and extraction industries accounting for JD5.25bn ($7.4bn) of that. Services totalled JD3.4bn ($4.8bn), with technology and communications at JD1.34bn ($1.9bn). Total mcap for the ASE at that time was JD19.14bn ($26.9bn). This has been in decline for some years, with 2008 seeing just over JD25bn ($35bn), and the 2011 total mcap JD200m ($281m) higher than that of 2012. The mcap-to-GDP ratio also dropped between those two years, from 103% to 94%. Total mcap for the ASE stood at $27.1bn in early May 2013.

FOREIGN OWNERSHIP: Foreign ownership of mcap increased year-on-year (y-o-y) in 2012, from 51.3% to 51.7%. As of April 2013, however, it stood at 51.2%. In financials 60% of stock is foreign-owned, while in technology and communications the figure is 62%. Some 63% of mining and extraction is foreign-owned, along with 52% of the food and beverages sector, thanks to 100% foreign ownership of National Poul-try. Indeed, the food and beverage sector saw a major hike in foreign interest, up from 44% in 2011.

While mcap may have fallen overall, the market’s total return increased. This was because dividend yields rose while capital losses fell, turning a -8.5% total return in 2011 into a +4.3% return in 2012. In this regard, the industrial sector was the market’s best performer, seeing a 6.7% total return, while services showed a gain of 2.4%. The financial indus-try gained just 0.2% in total returns, due to the sec-tor yielding the lowest dividends, at 3.5%, compared to services’ 4.9% and industrials’ 5.5%.

GENERAL INDEX: In terms of the exchange’s over-all performance, the ASE General Index is the primary indicator. The index is composed of the most liquid and highest-capitalised companies traded on the first and second markets. The index is set up as a free-float, mcap-weighted index. Therefore, the value of the free float shares of the company, rather than the total number of shares, is what is taken into account. This indicator provides a more accurate gauge of market performance. The index takes a 1000-point base line, starting in 1999. The ASE General Free Float Weighted Price Index saw a 1.77% decline in 2012, after opening on January 2, 2012 at 1992.82. At the close of the last day of trading – December 30, 2012 – the index stood at 1957.6. There was an uptick in early 2013, although this later levelled out, with the index at 1999.14 as of June 20, 2013.

In terms of sector performance, industrials were the best overall, with an annual rise of 1.2% in its index. In contrast, services saw a 2.5% decline, while financials fell 3.3%. Industries were aided during the year by strong performances in the mining and extraction sub-sector. Tobacco also saw some strong numbers, up 64% y-o-y, after a 20% rise in 2011. The top-performing tobacco company on the ASE was Al Eqbal Investment, which saw its shares rise 41% during 2012. Other strong industrial performers were Jordan Ceramic Factories, which gained 181%; Union Advanced Industries (in print and packaging), which was up 64%; and Al Isra for Education and Investment, which rose 47%, according to a report released by AB Invest. Indeed, all three education stocks listed saw double-digit rises during the year. In addition, transportation came back after showing a poor per-formance in 2011, when it lost 40% overall, to post a 4.9% gain. Masafat for Specialised Transport led the way, with a 168% increase.

The financials segment was weighed down by loss-es experienced in banking, which dipped 2%, real estate, which fell 15%, and insurance, down 10%.Financial services, however, managed a rise of 4.6%, after a 44% loss in 2011. Union Investment Corpo-ration and International Brokerage and Financial Markets were the top gainers in this segment, with 91% and 85% increases, respectively.

DIVIDENDS: The textiles, leather and clothing subsector saw the biggest annual increase in dividends, by 1806% y-o-y to JD4m ($5.6m). Sector by sector, financials and industrials each contributed around 40% of the JD837m ($1.18bn) in total dividends, with the remainder coming from services, according to AB Invest. Mining and extraction contributed almost all of the industrial sector’s dividends, and banking almost all of the financial sector’s. Technology and communications took the lion’s share of services dividends, a pattern consistent with previous years.

Trading volumes saw a steep drop in 2012 com-pared to previous years. In terms of the actual num-ber of shares traded, the figure ended the year at 2.4bn, which was 41.1% down on 2011, according to the ASE. These were traded in around 1m trans-actions, down from 1.3m in 2011, a less dramatic decline, which indicated a proportionately larger number of small transactions in 2012.

The value of shares traded also fell, to JD1.9bn ($2.7bn) for the year overall, 36% lower than in 2011. The 2012 figure indicated a daily trading volume averaging JD7.7m ($10.8m). This continued a declin-ing trend that has been under way since the global downturn began in 2008, when the yearly total was just over JD20bn ($28bn).

The first half of 2012 brought slightly more trad-ing by value – around 56% of the annual total – with March and April seeing the most trades, at JD226m ($318m) and JD230m ($323m), respectively. The first quarter, which saw 29% of the year’s total trading, was the high point, with the second seeing 26%, the third 25% and the final quarter accounting for 19%. This followed a typical pattern, with the first quar-ter often the most active period. On a sectoral basis, the pattern was also similar to previous years, with financials accounting for the largest share of trades by value, at 59% of total market activity, followed by services at 21% and industries at 20%.

ON THE UP: While 2012 was the fifth consecutive year of decline, market watchers did see a glimmer of hope. The decline was the lowest for some time, certainly showing a marked improvement from the 15.9% loss of 2011. “If you look at the stock market in general, we are of the view that it has hit the bot-tom,” Capital Investments’ vice-president and head of research, Tarek Yaghmour, told OBG. “The mcap-to-GDP ratio has fallen dramatically in recent years and is now below 100%. This might be indicative of a coming upward correction, as valuations are low and profitability is rising.” Certainly, many are now taking another look at the ASE and wondering if the corner may already have been turned. Globally, many are forecasting a much better year for equities in 2013 than for some time.

OUTLOOK: There is a growing consensus that many companies are now seriously undervalued. Major firms, such as Jordan Telecom, Jordan Phosphate Mines, Jordan Electric Power and a range of outfits in education and banking, have learned their lessons, moved on from the downturn and are now record-ing good fundamentals. This, however, has yet to be fully reflected in their stock prices. “Mining, shipping, health, banking and education are doing very well,” Jordinvest’s chairman and CEO, Ahmad Tantash, told OBG. “Some valuations are very low. Some compa-nies are trading at below book value and below even two times earnings – companies that are still dis-tributing 10-15% dividends.”

What the market lacks is liquidity, which is an issue for Jordan overall. Yet as 2013 got under way, the arrival of grants from the GCC and a successful US-dollar-denominated domestic bond issuance saw foreign exchange reserves grow considerably.

Furthermore, local banks have also begun gaining confidence and some are now looking to increase their lending, particularly to small and medium-sized enterprises, supported by a $70m loan from the World Bank that specifically targets the segment. These developments have led many to be more opti-mistic that – political uncertainty notwithstand-ing – 2013 could be a much better year for the econ-omy as a whole, as well as for the capital markets.

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