New regulations and solid growth bode well for future prospects

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Capital markets in Oman have expanded considerably over the course of 2013 and 2014, driven by strong fundamentals, increasing economic diversification, and prudent market regulation and oversight. In the first nine months of 2014 market capitalisation of the Muscat Securities Market (MSM), Oman’s stock exchange, increased by 16% after growing 21.4% in 2013, according to data from the bourse. With 119 traded companies across a wide variety of sectors as of December 2014, the MSM is one of the more diverse markets in the region in terms of listed firms.

According to a 2013 report issued by the Capital Market Authority (CMA), the sector’s regulatory agency, Oman’s capital markets grew three times as fast as the country’s GDP and provided more financing to businesses than local banks by a factor of two. “It is clear that the diversification of the economy is happening in the capital markets,” John Spencer, head of strategy and business development at the CMA, told OBG. “Oman is a stable country, and the returns are high. With this in mind, investors are putting a lot of money into the capital markets right now.”

Despite the large number of listed companies, in terms of market capitalisation and turnover, the MSM remains one of the smaller exchanges in the region. As in many other frontier markets, there is not much liquidity on the bourse, and only a handful of stocks trade in large size. “The small size of the market can be partly attributed to the reticence of Omani family owned conglomerates to list,” explained Tariq Ibrahim Al Asfoor, executive vice-president of capital markets at the Oman International Development and Investment Company (Ominvest), a local investment firm. “The government has introduced all kinds of incentives to attract initial public offerings (IPOs), but as of yet nothing has really caught on.” Despite these challenges, many local players are optimistic about the future. The MSM is regarded as better regulated and, consequently, more transparent than many other exchanges in the Gulf, which reflects Oman’s reputation for stability.

History 

Oman’s first joint stock company was Oman Hotels, which issued shares to local investors in 1971. By the late 1980s, 71 local firms had issued shares and total public shareholder equity reached OR270m ($699.1m). The MSM was established by royal decree in June 1988, with a mandate to develop a formal capital market in the sultanate. For the next decade the MSM served as both the market operator and regulator. In 1997 the bourse became the first Arab exchange to implement electronic trading.

In the late 1990s the government issued a handful of new laws aimed at restructuring the capital markets sector and separating the operational and regulatory functions of the industry. The CMA was formed by royal decree in 1998, with a mandate to supervise the capital market and later the insurance sector in Oman. The regulator’s job has not changed much since then. Legislation introduced in 1998 also formalised the management and operational structure of the MSM and established the Muscat Clearing and Depository Company, which handles record-keeping and other technical operations on the market.

One of the CMA’s first initiatives was the issuance of a code of corporate governance, which brought local governance standards in line with international best practices. The CMA has updated the standards for listed firms several times in recent years, including in 2007, when the corporate governance department and a joint public-private sector committee were established; and in 2010, when the Oman Centre for Corporate Governance was launched. “Oman is widely recognised in the region and around the world as having very strong corporate governance standards,” said Mohammed Khamis Al Hussaini, director of economic research and studies at the Oman Chamber of Commerce and Industry. “This applies to both the capital markets and to the financial sector as a whole.”

Oversight

In recent years the CMA has taken an increasingly active role in the sector. “We are a small market in terms of overall valuation and activity right now,” Spencer told OBG. “But that just means we have a lot of room to expand. We are currently taking the lead in terms of facilitating that growth.” Indeed, in recent years the authority has introduced a variety of legislation mandating new reporting requirements and increased accountability measures, among other measures aimed at boosting the transparency of listed companies. In mid-2013 the MSM launched the MSM Sharia Index, which tracks sharia-compliant stocks. Most recently, the authority issued a raft of new rules in August 2014 aimed at further developing the insurance sector (see Insurance chapter).

As of late 2014 the CMA was in the midst of developing a large number of additional initiatives. For example, the authority planned to issue a consultation paper on the subject of small and medium-sized enterprises (SMEs) in early 2015, which are considered to be a key area of future growth in Oman (see analysis). Another project that is currently under way aims to revamp the sultanate’s debt and sukuk issuance regulations in an effort to encourage companies to make better use of bonds and other debt instruments as a means of raising capital (see analysis). The CMA also plans to look closely at topics including the potential introduction of other investment instruments, such as real estate investment trusts, commodities and some forms of derivatives. “The capital markets here do not really reflect the economy as a whole yet,” said Spencer. “For example, there are very few oil and gas firms involved in the market and no tourism companies at all. We are planning more than 50 projects over the next half decade or so, which we think could have a major impact on Oman’s capital markets.”

The Exchange 

The MSM is organised into four sectors – financial, industrial, services and bonds, the last of which accounts for only a small percentage of overall value. By the end of September 2014 market capitalisation of the MSM had reached OR15.61bn ($40.42bn), up 16% year-on-year (y-o-y), according to data from the exchange. In the first nine months of 2014 market turnover reached OR1.7bn ($4.4bn), a 3.4% y-o-y increase. Over the same period the number of securities traded on the exchange declined considerably, from 6.43bn to 5.09bn shares.

The jump in activity and overall market value in the first three quarters of 2014 can be attributed in large part to rising valuations in the financial sector. In the first nine months of the year the value of financial shares traded was OR926.3m ($2.4bn), compared to OR569.5m ($1.5bn) in the services sector and OR203.6m ($527.2m) in industry.

The benchmark MSM 30 Index, meanwhile, is made up of the 30 most liquid companies on the exchange and is rebalanced on a quarterly basis. At the end of September 2014 the MSM 30 closed at 7484 points, up 12.6% from 6647 points the year before. Despite its benchmark status, many local players consider the MSM 30 to be a poor measure of overall market performance. One flaw with the index is that it does not take dividends into account and therefore is not representative of total investor returns. The CMA is aware of these issues and has long-term plans to introduce a number of new indices within a year or two.

Institutional investors account for a considerable percentage of the trading that takes place on the MSM, which is widely regarded as a sign of market maturity. According to data from the exchange, in the first nine months of 2014 institutions accounted for nearly 66% of the total value of share sales and 71.5% of share purchases. Oman’s capital market is also highly international. As of the end of September 2014 non-Omanis owned 29.4% of shares on the exchange, according to data from the MSM, up from 27.7% at the end of 2013. Investors from other GCC countries accounted for a substantial percentage of overall foreign ownership on the market, at 55%.

Market Breakdown 

At the end of 2013 the financial sector, which comprised eight listed banks and 26 other firms – including investment companies and private equity players, among others – accounted for OR4.2bn ($10.9bn) in market capitalisation, which was equal to nearly 30% of total MSM capitalisation. Bank Muscat, the sultanate’s largest bank, is also its largest listed company, with market capitalisation of OR1.32bn ($3.42bn) as of December 2014 – equal to nearly 14%of the overall MSM. Other financial players include Bank Dhofar, with market capitalisation of OR451.3m ($1.2bn) in December 2014; the National Bank of Oman, at OR414.4m ($1bn); and HSBC Bank Oman, with OR376.1m ($973.9m). “The financial sector, which forms the largest sector component of the MSM, has outperformed the broader market for the year-to-date in September 2014, and some companies in the financial sector seem to be relatively overvalued,” Manish Palande, investment manager at Al Anwar Holdings, told OBG. This situation is a result of recent growth in the sultanate’s banking sector (see Banking chapter).

Oman Telecommunications (Omantel), with market capitalisation of OR1.2bn ($3.1bn) as of December 2014, is the second-largest firm listed on the MSM. Other large listings in the services sector include Ooredoo Oman, the sultanate’s second mobile telco, and Renaissance Services, an oil and gas transport service operator. Major listed industrial firms, meanwhile, include Raysut Cement, Oman Cement and Oman Cables Industry, among others. In the first nine months of 2014 Omantel was the most active security on the MSM, with 135.1m shares traded and a total traded value of OR209.9m ($543.5m). This high level of activity is a result of the sale of 19% of the government’s stake in the firm in an IPO carried out in April 2014, which reduced the state’s ownership stake to 51%.

Oman and Emirates Investment Holding was the second-most active security over the period, with 418.7m shares traded for a total traded value of OR101.5m ($262.8m). Other active securities during the period included a number of banks and investment firms, such as Gulf Investment Services, Oman Investment and Finance, and Bank Muscat.

Islamic Market 

One key trend in Oman in recent years has been the rise of sharia-compliant products and services, despite the fact that the sultanate was a relative latecomer to Islamic finance. While many other Gulf countries have been active in this area since the early 2000s, the Central Bank of Oman (CBO) did not authorise the use of Islamic products until 2011. Due to growing demand from consumers and the financial sector alike, the CBO published its “Islamic Banking Regulatory Framework” in 2012, which effectively legalised a variety of basic sharia-compliant products. Several new entities have set up shop in Oman since 2011, including two full-fledged Islamic banks – Bank Nizwa and alizz islamic bank.

Accordingly, in 2013 the MSM established a Sharia Index, made up of listed firms certified by the Accounting and Auditing Organisation for Islamic Financial Institutions, a Bahrain-based entity that prepares and maintains sharia-compliant standards for Islamic financial institutions around the world. In addition to the newly formed financial companies, the index includes a range of industrial and service companies. In late 2014 the Islamic index was made up of 32 firms, with major constituents including Omantel, Ooredoo Oman, Oman Cement and Raysut Cement. “The CMA and the MSM have had a positive impact on the sharia-compliant financial sector in recent years,” Helmi Harun Rashid, deputy general manager of markets and investments for wholesale banking at Bank Nizwa, told OBG. “The new Islamic index was a big step, for example, and they have shown that they are eager to attract and approve new Islamic products in the future as well.”

Products 

Like most other exchanges in the region, the MSM is dominated by equity listings. As of December 2014 there were 156 securities listed on the MSM, including 119 company stocks, 18 bonds and 19 mutual funds. Short-term government listings made up the vast majority of the sultanate’s bond market, with government debt accounting for around 76% of the bond market’s total value as of December 2014. “We extend 28-day certificates of deposit (CDs) on the MSM on a regular basis,” Amal Yousuf Al Raisi, manager of economic research and statistics at the CBO, told OBG. “The primary purpose of these bonds is to soak up short-term liquidity in the banking sector. For a while we also issued 90-day CDs, but there was very little appetite for these products, so we stopped.”

The corporate bond market is made up almost entirely of issuance from financial entities. As of December 2014 there were 10 outstanding corporate issuances on the MSM, including three bonds each put forward by Bank Muscat and Al Omaniya Financial Services, and listings by Ahli Bank, Bank Sohar, Muscat Finance and Renaissance Services. The tenures of these listings varied from two to seven years, with the majority falling in the three-to-five-year range. Most subscribers to Omani corporate bonds employ a buy-and-hold strategy. Indeed, the secondary debt market in the sultanate is virtually non-existent. In 2013 bond trading totalled just OR46.9m ($121.4m), or around 2% of all trading on the MSM. Mutual funds (MFs), which began in the mid-1990s in Oman, became increasingly popular among local investors in the mid- to late-2000s.

The pace of growth in the MSM as a whole has since cooled. In general, however, local MFs seek to outperform the MSM 30 benchmark fund, with most continuing to achieve this goal. In 2013 at least nine funds posted returns of over 25%, compared to MSM 30 growth of just below 19%. Bank Muscat’s Oryx Fund, invested across the GCC, reported returns of nearly 48% in 2013, followed by the Vision Emerging GCC Fund (47.1%) and the Vision Real Economy GCC Fund (40.4%).

Listings 

In recent years many new firms have listed their shares on the MSM. Both of the sultanate’s new sharia-compliant banks completed successful IPOs in 2012, while the market saw another four IPOs in 2013, including two utilities – the Sharqiyah Desalination Company and the Sembcorp Salalah Power and Water Company – and two takaful companies, namely Takaful Oman Insurance and Al Madina Takaful. The over-subscription of all four of these initial offerings attests to the high level of demand for more new listings in Oman. Three more IPOs were launched in 2014. Al Sawadi Power, Al Batinah Power and Al Maha Ceramics. Once again, all of them received excellent response and provided handsome returns to investors. Moreover, an offer for sale by Omantel was also completed in 2014, which brought down the government of Oman’s shareholding in Omantel to 51%.

“The overwhelming response to most of the IPOs by retail and institutional investors in recent years has created a very conducive environment for launching more IPOs," Pradeep Asrani, managing director of Gulf Baader Capital Markets, told OBG. “In this regard, the announcement in the 2015 budget to divest stakes in some more government-owned companies over the next three years augurs well for MSM.”

The government’s public offering on exchange of a further 19% of Omantel in April 2014 was regarded as the beginning of a period of privatisation of state assets. Indeed, in March 2014 the government announced that it planned to privatise one more state company before the end of the year, though this had yet to come to fruition as of December 2014. Longer-term plans include restructuring some 65 state-owned firms into a handful of holding companies, which will likely be partially listed on the MSM (see Economy chapter). While the Omantel listing, which raised around OR204m ($528.2m), was by far the largest capital-raising event in the first half of 2014, a few other firms also successfully listed during this period. In April Al Maha Ceramics divested 35% of its shares for OR7.9m ($20.5m), while National Gas raised OR5.86m ($15.2m). Lastly, in May two independent power producers, Al Suwadi Power and Al Batinah Power, issued shares worth OR32.5m ($84.2m) and OR30.2m ($78.2), respectively. Other listings are also anticipated in the insurance sector. In August 2014 the CMA issued an amendment to the insurance law, requiring local players to increase their paid-up capital and list on the MSM within three years (see Insurance chapter). This should prompt greater activity in the future.

Outlook 

Various challenges remain despite sector growth in recent years. At end-2013, the total value of the market was equal to less than 50% of GDP, below averages of 80% in emerging markets and 120% in the US. Although the CMA is working to expand the market, equities have dominated in recent years. Despite the bonds that have been issued, activity on the secondary market is lacking, and no other types of securities are as yet on offer. The MSM 30’s historical correlation with OPEC basket prices, 91% from 2007-10, raises concerns as oil prices plummet.

Nonetheless, most local investors expect continued growth in the long term. Over the course of the past decade, the MSM has been less volatile than most neighbouring markets. This can be attributed in large part to prudent corporate governance practices and high-quality financial reporting. The MSM has attracted a high number of institutional investors, as opposed to individual retail ones, bolstering stability. “Given the strong fundamentals and market sentiment, the MSM is considerably undervalued at the moment,” Al Asfoor told OBG. “There are certainly challenges to consider, but in general the outlook is broadly positive.”

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The Report: Oman 2015

Capital Markets chapter from The Report: Oman 2015

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