In 2013 Kuwait’s capital markets posted solid growth. By the end of the year trading volumes, earnings and market capitalisation at the Kuwait Stock Exchange (KSE) were up substantially on 2012. The KSE’s steadily improving performance over the past half decade – not to mention its future prospects for continued expansion – can be attributed in large part to the government’s capital markets reform programme, which was codified in the 2010 Capital Markets Law (CML). Since then many aspects of both the regulatory and operational environment have changed dramatically. A handful of major additional reforms – including the privatisation of the KSE and the introduction of derivatives to the trading platform – are expected to be put in place during 2014 and 2015. These initiatives are expected to do more to boost Kuwait’s status as an investment destination.
While the KSE has seen steadily improving performance data in recent years, Kuwait’s financial market currently faces a number of challenges. The majority of the trading activity on the exchange in 2013 took place among small-cap stocks (see analysis), and was driven by speculative investments made by individual domestic investors. Increasing the percentage of institutional and foreign investment activity at the exchange is one of the major objectives of the government’s reform programme. Moreover, intermittently dwindling investor confidence is another challenge. Although the market has recovered considerably since the 2008 international economic downturn sapped demand for investment activity, as of the end of 2013 the KSE’s market capitalisation remained down some KD26bn ($91.42bn) as compared to the end of 2007. Other challenges currently facing the KSE include a number of hurdles related to the implementation of the reform programme itself, including both legal issues and other obstacles to implementation.
Despite these challenges, many local players are optimistic about Kuwait’s future as both a key source of and a major destination for a wide variety of investments and capital markets activity. The KSE is both the oldest bourse in the GCC, and, as of the end of 2013, had the highest number of listed companies regionally, with 196.
According to the KIPCO Asset Management Company (KAMCO), a major local financial services company, as of late February 2014 – the most recent period for which figures were available at the time of publication – the KSE’s market capitalisation was at KD31.76bn ($111.67bn), up from KD31.11bn ($109.39bn) at the end of 2013 and KD28.94bn ($101.76bn) at the end of 2012. As of the end of 2013 the KSE was the fourth largest in the GCC by market capitalisation, after Saudi Arabia’s Tadawul exchange, the Qatar Exchange and the Abu Dhabi Securities Exchange. In 2013 the KSE was tied for first (with the Dubai Financial Market) in the region in terms of trading volume, with more than 290m shares being traded on a daily basis on average.
Kuwait’s capital market industry began in 1952, when a group of businessmen issued 13,100 shares of stock to form the National Bank of Kuwait (NBK), which was both the first shareholding company and the first national bank to be established in the Gulf. In 1962, the first iteration of a formal stock exchange was established in Kuwait. The government passed various policies during the 1960s and 1970s with the goal of regulating the nascent market. During this period trading activity and growth were related to the country’s large oil revenues. This resulted in a speculation-driven boom and, in 1977, a major market correction. In response the government bailed out local investors and introduced a strict new regulatory regime.
In the 1970s and early 1980s a substantial amount of liquidity was moved out of the tightly controlled formal market, and invested instead in an informal exchange set up on the outskirts of Kuwait City. Known as the Souk Al Manakh (“camel market”), this unregulated market was the site of a considerable amount of speculative, high-volume trading activity. In August 1982 the Souk Al Manakh crashed, which resulted in a series of defaults throughout the Gulf region, and left all of Kuwait’s financial institutions – with the sole exception of NBK – insolvent. After shutting down the informal market, the government provided financing and a blueprint to rebuild the country’s financial industry. In August 1983 the KSE was formally established, with a mandate to both operate the trading platform itself and regulate investment and trading activity.
Activity at the new exchange was well under way when Kuwait’s capital markets and financial system at large were decimated once again as a result of the 1990-91 Gulf War. In the wake of the war the government was forced to bail out the exchange once again. Beginning in the early 1990s, easy access to cheap credit and relatively low barriers to entry resulted in a jump in activity on the KSE. Numerous new investment companies (ICs) were established during this period, many of which invested heavily in the equity and real estate markets. In 1995 the KSE introduced electronic trading for the first time, and online trading was launched in November 2003. When the economic downturn swept through the Gulf in late 2008, many of the ICs were hit hard.
Since 2009, the government has rolled out a number of new laws and programmes in response to the crisis. The Financial Stability Law (FSL), which was passed by the Central Bank of Kuwait in March 2009, for example, established a government-sponsored debt restructuring mechanism for local ICs and other institutions that had been negatively impacted by the downturn. The aforementioned CML, which came into effect in February 2010, was developed with an eye towards a total overhaul of Kuwait’s capital markets regulatory framework. The law was based in large part on the capital markets legislation drawn up by Saudi Arabia’s Capital Markets Authority (CMA) and the US Securities and Exchange Commission.
Among the law’s consequences was the establishment of Kuwait’s own CMA, which took over as the sector regulator in 2010. The formation of a dedicated, independent sector regulator was widely considered to be a major improvement on the system that was in place prior to the introduction of the CML, wherein various financial authorities – including the KSE’s management arm, the CBK and the Ministry of Commerce and Industry – oversaw different components of the system. “The establishment of the CMA enhanced the regulatory framework to improve the efficiency of the overall financial market,” Wassim El Hayek, vice-president of the Investment Research Department at KAMCO, told OBG. “While there has been a learning curve – both for investors and the new regulator – so far the authority has definitely had a positive impact overall.”
In addition to establishing the CMA, the CML included clauses aimed at boosting transparency, corporate governance and risk management among listed firms, ensuring firms are in line with best international practice and, eventually, privatising the KSE in an initial public offering (IPO). “So far the biggest single change brought about by the CMA, in addition to strict transparency and disclosure rules, has been the heightened supervision to detect market manipulation by identifying suspicious and speculative trades stemming primarily from insider and illegitimate trading activity,” said KAMCO’s El Hayek. Since 2009 the new regulator has suspended and delisted a handful of ICs and other firms.
The KSE’s privatisation– which was well under way as of time of publication – was expected to further improve security and operations at the bourse. In 2013 the CMA established Bourse Kuwait, the company that will eventually take over the management of the exchange. “The CMA will supervise the privatisation effort until the new bourse is up and running,” Issam Alusaimi, a technology and development advisor at the KSE, told OBG. “Bourse Kuwait will technically be owned by the CMA until privatisation, but it will be operated as an independent entity.” Indeed, ensuring that the regulatory and exchange management side operate independently of each other is one of the key objectives of privatising the exchange. Additionally, the privatisation effort is expected to lead to further improvements at the KSE in terms of corporate governance, risk management and, consequently, overall competitiveness, both within the KSE itself and between Kuwait’s capital markets and others throughout the Gulf region. “In general, after the newly privatised exchange is up and running I expect to see greater concern with business practices, updates to the settlement cycle and, we hope, more firms listing on the KSE,” said the KSE’s Alusaimi. “It will probably take a few years for these changes to take hold, but the process is under way.” Since the privatisation effort kicked off in earnest in early 2012, a handful of international firms have been involved in an advisory role, including the UK-based financial services firm HSBC Holdings and the US-based international law firm DLA Piper. Early versions of the privatisation blueprint included a long-term goal of selling 50% of the exchange to listed companies, thereby giving market participants a stake in the efficient operation of the KSE; and selling the remaining 50% of the exchange to Kuwaiti nationals in an IPO. The status of these plans remained unclear at the time of publication. A variety of legal and other hurdles have slowed the privatisation effort, including complaints from some KSE employees about moving to private sector positions, which are generally considered to be less prestigious than public sector jobs in the Gulf, and some of the language of the CML itself.
New Features At The Bourse
In conjunction with the introduction and implementation of the CML and other efforts on the regulatory side over the past half-decade, the management of the KSE itself has also undertaken a number of major new initiatives. In October 2009 the bourse signed a KD18.3m ($64.34m) contract with the world’s largest bourse operator, the US-based firm NASDAQ OMX, to install the company’s X-Stream Trading platform at the KSE. The electronic system, which came online in May 2012, is currently in place at more than 15 other exchanges around the world, and is a major step up on the KSE’s previous system.
Most importantly, X-Stream is capable of handling a wide variety of financial instruments, including fixed-income products and exchange-traded funds (ETFs), among others. As of time of publication, the KSE was solely an equities exchange, as it had been since Kuwait’s capital markets first came into existence in the 1960s. According to the KSE’s Alusaimi, the derivatives platform has been operational since December 2013. Provided the new products receive regulatory approval from the CMA, derivatives trading is expected to begin before the end of 2014. The KSE plans to roll out new products one by one, with the goal of giving traders time to learn how various products work before introducing others. Likely initial listings include ETFs, options and bonds, according to Alusaimi (see analysis).
While the implementation of the X-Stream trading platform in 2012 and the launch of derivatives have been the highest-profile initiatives at the KSE in recent years, the management of the exchange has also overseen various other structural changes as part of the overarching market overhaul effort. In late 2009, for example, the KSE introduced both a new flagship index, the Kuwait 15 Index (K15), and a new market classification system.
The new flagship index, which is made up of the top 15 listed firms as defined by liquidity and market capitalisation, is the first of a handful of new planned indices, with the goal of boosting the overall number of investible options at the KSE. As part of this new market classification system, the KSE has adopted the International Industry Classification Benchmark System. This is a widely used international standard mandating the organisation of listed firms into 15 sectors, up substantially from the eight sectors that were previously in place at the bourse.
The numerous initiatives put in place at the KSE since 2009 have resulted in steady improvement in most indicators in recent years. In 2013 the bourse saw total market capitalisation expand by around 7% over the course of the year, from KD28.9bn ($101.62bn) at the end of 2012 to KD31.1bn ($101.39bn) at the end of 2013, according to KAMCO data. Trading volume also rose substantially in 2013, to more than 8900 daily trades on average, up from just over 4800 daily trades in 2012, for example, which points to rising investor confidence. The price index, meanwhile, jumped by around 27% over the course of the year, from 5934.28 at the end of 2012 to 7549.5 at the end of the 2013. The KSE Weighted Index, meanwhile, rose 8.4% in 2013, which is in line with the fact that the majority – between 50% and 55%, according to data from the KSE – of the investors that take part in trading at the KSE are individual retail investors. Indeed, a considerable amount of the trading activity on the KSE in 2013 can be attributed to speculation, largely in relation to small-cap equities (see analysis).
The market capitalisation of the firms that made up the K15 index was at KD16.6bn ($58.37bn) at the end of 2013, equal to around 53% of the total KSE market cap. This is down from K15 market capitalisation of KD18.9bn ($66.45bn) at the end of 2012, which was equal to 65% of total market capitalisation at the time. The decline in the value of the K15 in 2013 can be attributed primarily to a reshuffling of the firms that make up the index and to a jump in the value of many of the small-cap stocks that make up the rest of the KSE (see analysis).
Major Sectors & Players
Kuwait’s large banking sector has dominated the market for years. By the end of 2013 banks accounted for 47% of total KSE market capitalisation, according to data from KAMCO. The second- and third-largest sectors were telecoms listings, at 13% of market capitalisation, and the financial services (non-banking) sector, at 11%. This was followed by industrials at 9%, real estate at 8%, consumer goods at 4%, consumer services at 3% and basic materials at 2%. Other smaller sectors included oil and gas (1%), insurance (1%), health care (1%) and technology (0.2%), among others.
NBK was the single largest listing on the KSE as of the end of 2013, with a market capitalisation of KD4.07bn ($14.31bn), which was equal to 13.1% of the KSE’s total market capitalisation. Kuwait’s largest bank was followed by Kuwait Finance House (KFH), the nation’s second-largest bank by assets, with market capitalisation of KD3.07bn ($10.79bn), which was equal to 9.9% of total KSE market capitalisation. Zain – a multinational telecommunications company headquartered in Kuwait – was the third-largest firm on the exchange by market cap during this period, at KD2.9bn ($10.2bn), which was equal to 9.6% of the total value of the KSE.
Together these three firms made up 32.6% of total market capitalisation at the end of 2013. Among the top 10 in terms of market capitalisation at the end of 2013 were Ahli United Bank, Gulf Bank, Boubyan Bank, Kuwait Food Company, Commercial Bank of Kuwait and Burgan Bank. Altogether, eight of the top-10 largest firms on the KSE at the end of 2013 were banks, which is in line with the historical dominance of the banking sector on the bourse.
By the end of February 2014 there were 90 ICs operating in Kuwait, including 41 conventional companies and 49 firms that carry out business according to the principles of sharia. Despite high rates of deleveraging since the crisis, many ICs have continued to see declining revenues and assets. According to data from the IMF, from end-2008 through the end of May 2013 total IC assets shrank by 36%, while assets managed by the companies shrank by 15% over the same period.
Bearing this in mind, a handful of ICs have entered into debt restructuring since the downturn under the CBK’s aforementioned FSL, passed in March 2009 in an effort to provide legal and financial assistance to companies that faced default. ICs that had entered the programme as of the end of 2013 include The Investment Dar, which has been working to restructure some $3.7bn of debt since 2011; and Aayan Leasing and Investment Company, which launched a KD205m ($721.6m) restructuring programme under the FSL in May 2011. A number of other ICs have dealt with their debt issues without the assistance of the FSL. Global Investment House, which has carried out a variety of payment deferral programmes and related initiatives since 2011, successfully completed its restructuring effort in July 2013 when it shifted both its equities and debts to two special-purpose entities. Similarly, since mid-2011 the Noor Investment Company has entered into a number of debt-related deals with local lenders.
Although these firms were hit hard by the 2007-08 downturn, a majority of Kuwait’s ICs invested carefully before the crisis and have continued to operate through the fallout. According to IMF data, as of the end of May 2013 conventional ICs had total assets of KD6.6bn ($23.21bn), while sharia-compliant ICs had assets of KD5bn ($17.6bn). These figures are down substantially from the end of 2008, for example, when conventional firms had total assets of KD10.3bn ($36.33bn) and Islamic firms held KD7.8bn ($27.43bn). Additionally, off-balance assets at all ICs decreased from KD24.6bn ($86.5bn) at the end of 2007 to KD18.7bn ($65.75bn) at the end of May 2013. Despite these losses, both conventional and Islamic ICs were relatively well positioned as of the end of 2012, with assets capitalisation hovering around 37% in total.
That said, most firms remain somewhat exposed to equity and real estate markets. The ongoing financial slump in the EU and in other specific markets around the world has had a negative impact on Kuwaiti ICs. According to IMF data, foreign assets accounted for 48% of total IC assets as of the end of May 2013. Since September 2011 the CMA has had the responsibility of regulating investment activities at Kuwait’s ICs, while lending activities are regulated by the CBK. Both entities have worked to encourage ICs to shore up corporate governance and risk management practices in all areas, and many local players have done so.
Despite the lack of a secondary bond market, Kuwait has seen considerable demand for primary debt listings in recent years, despite low interest rates. Since the downturn the CBK has regularly issued short-term treasury bills, for example, in addition to other debt instruments, with the objective of soaking up excess liquidity. Still, many local players want the state to do more.
“The low level of long-term government issuance in recent years has been a major challenge, as it means there is no yield curve to speak of,” said Ziad Shehab, vice-president of the Investment Research Department at KAMCO. During 2013 the central bank made an effort to develop the yield curve, issuing CBK bonds at three- and six-month maturities, in addition to one- to 10-year treasury bonds. Corporate debt issuance is moreover increasingly considered to be a viable source of financing for many major local firms. For example, in early February 2014, KIPCO was able to successfully price a $500m dollar-denominated bond with a maturity rate of five years on the international market. The listing, which was six times oversubscribed and was facilitated by BNP Paribas, HSBC and JP Morgan, is the first large-scale international listing in the Middle East and North Africa region in 2014, and follows on a series of other debt issuances carried out by KIPCO.
Other local firms that have already issued corporate debt in recent years include the United Real Estate Company and Burgan Bank. Along with fixed-income instruments, as well as a variety of other products expected to begin trading at the KSE before the end of the year, by early 2014 investors were looking forward to a period of growth in alternative products. Another potential growth area is in unlisted, over-the-counter (OTC) equities. While these products are currently traded among local investors, the market is informal and largely opaque. “We are currently studying setting up a formal OTC market,” the KSE’s Alusaimi told OBG in February 2014. “This would likely boost transparency considerably.”
Contrary to many other frontier markets around the world, there have been a number of listings on the KSE since 2010, although the count of delisted companies during the same period surpassed new listings on the exchange. In addition, listing plans for a handful of firms that have announced plans to go public in recent years are yet to take off. Most recently, OSN, a Dubai-based pay-television network that is 60% owned by KIPCO, cancelled a planned IPO in late 2013. The reversal came five months after KIPCO hired the private investment institution Rothschild to act as an advisor on the listing in June 2013 and just three days after OSN was revalued at $4.3bn – up from $2.5bn previously – by Arqaam Capital, a Dubai-based investment bank. The cancellation was, according to OSN executives, a result of the fact that the firm had decided to focus on growing its core business further before taking the company public.
Other Kuwaiti companies that have either planned to list or have been rumoured to be considering listing in recent years include the Kuwait Energy Company, an oil and gas producer, which has delayed the move a number of times since 2010 due to weak market conditions; Sahaab Leasing, which is owned by the regional low-cost airline Jazeera Airways; Gulf Holding Company, an Islamic investment firm; and Kuwait Airways, the national carrier, which was originally scheduled to list in 2010, but has yet to do so.
The privatisation of the KSE, which is currently under way and is expected to be completed before the end of 2014, includes plans to sell 50% of the exchange to nationals in an IPO. The bourse privatisation project is widely considered to be the first of what might eventually become a substantial number of state privatisation projects in Kuwait. This, in turn, could potentially result in a handful of new public offerings in the coming years. In addition to Kuwait Airways, for example, in early 2013 the government announced that eventually it planned to sell 50% of the Al Zour Independent Water and Power Plant (IWPP) on the KSE. The IWPP project, which is currently under way, is one of the first major developments to be carried out under the state’s $108bn National Development Plan, a long-term infrastructure blueprint that was launched in 2010.
Kuwait’s capital markets currently face a number of challenges. In addition to the low overall number of institutional investors carrying out business at the exchange, and the fact that small-cap equities have accounted for the majority of the trading activity in recent years, investor confidence remains considerably down on the pre-crisis years. While the investment sector has recovered considerably since the lows of 2009 and 2010, hurdles remain. “Over the past three years, several investment companies in Kuwait have restructured their borrowings, primarily through extending tenors and a handful of debt-to-equity swaps, coupled with haircuts on principal debt balances,” Fares Hammami, the vice-president of investment banking at NBK Capital, told OBG. “Companies have not been as successful in restructuring their asset bases given the slow recovery of some equity capital markets.”
Despite these issues, many local players remain optimistic. At the end of 2013 market capitalisation and liquidity were up at the KSE, and these indicators are expected to continue to rise through 2014. “We hope and expect to see liquidity improve through 2014,” the KSE’s Alusaimi told OBG. Additionally, a number of major upcoming changes at the exchange have the potential to transform the country’s capital markets sector as a whole. In addition to the privatisation of the KSE – which is widely expected to result in a major improvement in overall transparency – the impending launch of derivatives bodes well for future growth. “Having been the leader in the past, we now have to catch up with the rest of the GCC,” said Alusaimi. “And in the next decade we intend to once again surpass other markets in the region.”
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