The Kuwait stock market is undergoing a series of upgrades and changes, which taken together have the potential to trigger a transformation in the market’s daily operations and long-term prospects.
These changes began in 2016, with private operator Boursa Kuwait taking over operations of the publicly owned bourse, then known as the Kuwait Stock Exchange (KSE). In mid-February 2018 the Capital Markets Authority (CMA) – established in 2010 to regulate and supervise all activities related to securities trading – announced that it expanded the team of companies overseeing the privatisation of the exchange, adding local firm Tri International Consulting to a group that had previously included local and international investment management firms, consultancies and law firms.
The following April the CMA launched a bidding process for an equity stake in Boursa Kuwait capital stocks of between 26% and 44%. The winner of the auction will take control of an exchange that, in September 2018, was promoted to secondary emerging market status after adopting the FTSE Russell Industry Classification Benchmark (ICB) the previous June. The initial public offering (IPO) of the stake is expected to be launched in the first quarter of 2019.
In a sign of the increasing maturity of the country’s financial services, Boursa Kuwait was admitted to the World Federation of Exchanges in October 2018, the international association of regulated securities exchanges. Taken together, the shift from public to private ownership and the new emerging market status signal an attempt on the part of the CMA to further strengthen its financial sector and to attract additional investment in the coming years.
These upgrades follow on what was by all accounts a banner year for Kuwait’s capital markets. In 2017 the exchange was the best-performing market in the GCC region, with a price-weighted index return of 16.9%, according to a recent report published by First Abu Dhabi Bank. In addition, as of the third quarter of 2018, Kuwait’s main index was up nearly 9%, out competing neighbouring markets.
This performance, together with recent changes, have lead the CMA and local investors to have a bullish outlook on 2018, with the new market designation alone forecast to attract foreign capital inflows of between $100m and $700m in the coming years, according to FTSE’s most recent country classification review. “Our objective is to develop a competitive, leading regional stock exchange for the state of Kuwait, which provides issuers with efficient access to capital and investors with diverse return opportunities,” Mohammed Ahmed Al Saqqaf, the chairman of Boursa Kuwait, told local media in February 2018.
Market History & Restructuring
The first shareholding company in Kuwait was the Bank of Kuwait and the Middle East, which was established by a group of UK investors in the early 1940s. Over the ensuing decades a range of additional shareholding firms were launched, primarily in the financial services sector. Stock trading was carried out on an informal, loosely regulated basis during the 1960s and 1970s, which resulted in a number of boom-and-bust cycles and considerable economic volatility in certain segments of the economy (see Banking chapter).
Following a particularly injurious bust in the early 1980s, which left most domestic financial institutions insolvent, the Central Bank of Kuwait and the Ministry of Finance intervened, introducing sweeping regulatory framework reform and formally establishing the KSE, which is now known as Boursa Kuwait. Today, the exchange ranks among the oldest and largest in the GCC. Since the 1990-91 Gulf War, which again decimated Kuwait’s financial infrastructure, necessitating another state intervention, the bourse has expanded rapidly. In preparation for the upcoming privatisation effort, the market has undergone a series of technical upgrades and restructuring moves. In May 2017, for instance, the exchange instituted a T+3 settlement cycle, requiring investors to settle their security transactions within three business days of the trade date. This change brought Kuwait in line with global settlement standards.
The second stage of the market’s strategic reformation was enacted in April 2018, when the bourse was reorganised into three new market segments, namely a premier market, a main market and an auction market. Each listed security will be assigned to one of the new segments, based on a range of criteria, including capitalisation, years in operation, regulatory compliance and liquidity, among others.
Broadly speaking, large companies with high liquidity and a strict record of compliance and transparency have been listed under the premier market heading, while firms with low liquidity are listed under the auction market. All other companies are listed on the main board. The CMA reforms also included updated listing requirements and the issuance of a new rulebook for listed companies. Market segmentation is common practice at most major exchanges around the world, including at the Nasdaq and the London Stock Exchange, and provides greater investor protection.
Along with the changes, Boursa Kuwait introduced a new set of market cap-weighted indices to replace those previously used. The Premier Market Index and the Main Market Index track their respective segments separately, while the General Market Index covers securities in the main and premier markets together. Boursa Kuwait has also implemented 13 sector-specific weighted indices covering oil and gas, basic materials, industrials, consumer goods, health care, consumer services, telecommunications, utilities, banks, insurance, real estate, financial services and technology. Companies included on the auction market are not yet tracked by any index. Furthermore, besides segmenting the market and adding new indices, Boursa Kuwait also relaxed its listing rules and delisted companies seen as unsuitable for public investment.
As of the end of June 2018 there were 175 securities listed on the exchange in total, according to data reported by Boursa Kuwait. Of these, 16 firms were listed on the premier market, 146 were on the main market and 13 on the auction market. Market capitalisation in the same period registered KD27.88bn ($92.4bn), down slightly from KD27.94bn ($92.6bn) at the end of 2017, but notably up on KD26.54bn ($88bn) at the end of 2016.
As mentioned above, 2017 was a strong year for the exchange. In 249 days of trading, the market saw an increase in shares traded of almost 66%, from 30.5bn in 2016 to 50.6bn. The value of traded shares rose nearly 99%, from KD2.88bn ($9.5bn) in 2016 to KD5.73bn ($9bn) in 2017. Similarly, market capitalisation rose almost 5.3% over the course of 2017.
Market analysts and exchange representatives alike attribute rising activity on the bourse in 2017 to the ongoing privatisation effort and the implementation of the CMA’s oversight and reform programme. However, the value of listed stocks is heavily concentrated in a handful of sectors. As of the end of 2017, the value of listed banks totalled KD13.94bn ($46.2bn), which was equal to 49.8% of total market capitalisation, according to data reported by the National Bank of Kuwait (NBK). This was followed by industrials, whose overall capitalisation stood at KD3.43bn ($11.4bn), or 12.2% of the total; telecommunications, with a market capitalisation of KD2.85bn ($9.5bn), or 10.2%; financial services, with KD2.51bn ($8.3bn), or 8.9%; and real estate, with KD2.09bn ($6.9bn), or 7.5%. The remaining eight sector indices had capitalisation of less than KD900m ($3bn), or under 3% of total.
Trading data from the first six months of 2018 affirmed the continued centrality of the banking sector on the stock market. From January to June 2018 bank securities accounted for 50.1% of the total traded value on the exchange. This was followed by industrials with 12.5%, telecommunications (10.8%) and financial services (9.9%). Other relatively important sectors included real estate (5.2%), basic materials (4.8%), consumer services (3.8%) and consumer goods (1.8%).
The market segmentation implemented in April 2018 has not been in place long enough to generate meaningful longitudinal data on the development of each of the three newly established segments. However, it is worth noting that companies in the premier segment account for around 60% of the total market capitalisation on the bourse.
To qualify for listing, each premier market firm must be valued at more than KD144m ($477.4m), with an average daily trading of at least KD90,000 ($298,400). By definition the largest listed firms in Kuwait are located on the premier market, including banking giant NBK, telecoms provider Zain Group and logistics firm Agility Public Warehousing Company.
Banking institutions account for the top-six largest firms by capitalisation on the premier market. Other key sectors included on the premier index include financial services, industrials, real estate, telecoms, basic materials and consumer goods. The main market, meanwhile, consists of 146 listed companies, each with average daily trading values of between KD22,500 ($74,600) and KD90,000 ($298,400).
Notable securities include major lenders – notably the Commercial Bank of Kuwait, Al Ahli Bank and Ahli United Bank – and a significant number of financial services providers, these include Kuwait Financial Center, First Investment Company, and KAMCO Investment Company, among others.
Market segmentation, technical upgrades and the pending privatisation of the bourse have been driven by the CMA, which has made it clear that it is working to expand the exchange to attract additional investment. “Over the past two years the CMA has been very active in upgrading regulations, both with regard to trading and in terms of protecting investors,” Wajih Al Boustany, an analyst at the investment management arm of NBK Capital, told OBG in July 2018. “As a result, the exchange is now looking like a more attractive option for investment, as opposed to, for instance, the real estate market.”
Boursa Kuwait has sought to raise awareness about recent changes in a range of foreign markets, with the aim of attracting additional foreign investment. In April 2018 the bourse and the regulator together brought representatives of eight of the country’s largest listed firms to London, where they hosted more than 60 meetings with potential institutional investors, these included commercial banks, endowment funds, pension funds and insurance firms. These meetings followed earlier visits to Dubai and New York.
“We came to London to raise awareness of [….] investment opportunities in the Kuwaiti stock market,” Khaled Abdulrazzaq Al Khaled, CEO of Boursa Kuwait, told local media. “The participation of eight of our locally listed companies was key to showcase specific investment options across a variety of sectors. Boursa Kuwait’s vision is to create a vibrant, mature and diversified market, and we have been making immense progress over the past two years.”
Nonetheless, the sector is not without its challenges. Corporate transparency has improved considerably over the recent past, in large part as a result of new rules and regulations put in place by the CMA. However, on the equity side, transparency remains an issue in some sectors of the market, according to local analysts. Indeed, the recent market segmentation calls attention to this issue, with listings on the main board held to a slightly lower standard in terms of corporate reporting than those listed on the premier market.
One of the more pressing challenges currently facing the exchange has to do with the continued lack of market depth. Attracting new listings across a wide range of sectors and facilitating regular trading of currently listed firms remains an ongoing issue for the CMA and the bourse operators.
Indeed, the current privatisation and regulatory reform drive is aimed precisely at drawing in additional market participants, in particular international institutional investors. At the same time, the regulator is working to attract new listings. The development of an IPO pipeline has become a key goal for the coming years. “While there are more than 170 listed firms in Kuwait, many of them see very little trading activity on a daily basis, and many of the country’s largest companies are not listed on the exchange,” Al Boustany, told OBG. “The bourse and the regulator need to explain the benefits of being listed to local private firms. They need to convince people that listing is a good way to raise financing.” However, as regulations and enforcement have become tighter in recent years, a number of firms have delisted from the bourse. Indeed, since 2012 some 49 companies have exited the market. According to the CMA, these departures were largely a result of companies not being able to meet newly instituted transparency requirements.
In the meantime, listing activity has been relatively slow. In February 2018 the bourse handled the private placement of 35% of the Integrated Holding Company (IHC), a sharia-compliant equipment rental and logistics company. The listing was oversubscribed by more than 230%, signalling significant appetite on the market. Given the number of investors involved in the private placement, IHC may be eligible to join the premier market upon launching.
The firm has announced that it plans to issue an IPO before the end of 2018, making it the first family-owned business to be listed on Boursa Kuwait in four years. Furthermore, the IPO is expected to be issued through a private subscription by selling a share of the equity without raising the capital.
A key potential future source of new listings are state-owned enterprises, of which a number are currently considering going public. For example, the Az Zour North Independent Water and Power Project, a public-private partnership (PPP) generation project, is expected to carry out a public share sale before the end of 2018.
Az Zour was developed by a collection of publicly-owned entities, including the Kuwait Authority for Partnership Projects, the Kuwait Investment Authority and the Public Institution for Social Security, in conjunction with a handful of private sector players, namely the French natural gas distribution firm Engie, the Japanese general trading company Sumitomo, and the Kuwait-based Abdulla Al Hamad Al Sagar & Brothers. The government plans to sell 50% of Az Zour North One, a 1500-MW power plant.
According to Boursa Kuwait’s management, an additional five to six Kuwaiti PPP projects will likely list on the market before 2022. Indeed, under a major revision to Kuwait’s PPP law in 2015, consortia set up to deliver power and infrastructure projects are required to eventually float a certain number of shares on the exchange in an effort to extend ownership of national projects to local investors. “We are expecting two or three major IPOs this year and the beginning of next year,” said Boursa Kuwait’s Al Khaled in March 2018.
While Boursa Kuwait has plans to add additional products in the coming years, as of mid-2018 it hosted only equities. Despite the lack of a formal debt platform, in the past half decade Kuwait has become a major player in the regional issuance of debt, with both the state and local firms issuing a significant amount of debt recently.
The list of players that issued primary, off-market bonds in 2016, 2017 and 2018 includes Kuwait International Bank, NBK, Kuwait Energy, Boubyan Bank, the Kuwait Projects Company, Burgan Bank and the Gulf Investment Corporation, among others. Most of these bonds are issued domestically and denominated in Kuwaiti dinars. Furthermore, in January 2018 the Parliament approved a draft of a new debt law, allowing the government to issue international debt up to KD25bn ($82.9bn) on a 30-year basis.
The law was widely seen as a move to protect the country from the effects of fluctuations in commodities prices, such as the falling oil prices in 2014, which required Gulf sovereigns to secure financing elsewhere. A recovery in the international price of oil since mid-2017, however, has reduced demand among regional countries. In March 2018, for instance, the government sold $3.5bn worth of five-year bonds and $4.5bn worth of 10-year bonds – less than a previously announced $10bn issuance. The appetite for Kuwait debt has proved significant, however, with orders for the issue totalling some $29bn.
While Kuwait’s capital markets have undergone significant reforms in recent years, additional changes are on the horizon. Following the anticipated sale of between 26% and 44% of Boursa Kuwait to an international operator or consortium, which is scheduled for early 2019, there are plans to sell between 6% and 24% of the exchange to public entities, as well as 3.5% of the bourse’s equity to Kuwaiti citizens in early 2019. The offering is expected to enable the implementation of a series of further upgrades and reforms in the future, including new trading and settlement systems and, eventually, the launch of derivatives.
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