For years the Muscat Securities Market (MSM) has been a small, but stable and growing bourse. Oman’s government and corporations are typically well financed on their own, and therefore access to capital has not been a driving factor helping to increase the size and ease of trading in formal capital markets such as the MSM. Authorities nonetheless see a broader, deeper market as a strategic goal to help create economic opportunity, and sustained dedication to that cause has paid off in recent years, chiefly in the form of an increased flow of initial public offerings (IPOs). The 2013 appearance of a sharia-compliant index and investment funds, as Islamic finance is now available in the country, is further proof of the potential in this segment.
Both Omanis and foreigners have been keen investors in MSM stocks recently. After a moderate performance in 2012 – the MSM benchmark index (MSM 30) climbed 1.15% in that year – investment picked up in 2013. In particular foreign investment climbed to levels unseen since the aftermath of the 2007-08 global financial crisis. In the third quarter of 2013 the index closed at 6646.85, a 20.1% increase over 5534.38 points in the same period the previous year.
In early December 2013 the market received a slight boost when leading stock Bank Muscat announced that it would recover $39m from a fraud case, with MSM 30 coming in around 6700 points. The index maintained its position over 6700 throughout most of the first half of that month.
Foreign ownership was just shy of the global average at 27.67% as of the end of the third quarter of the year, and the total value of shares bought by non-Omani investors reached OR358.15m ($927.6m) during the first nine months of 2013. Although the MSM experiences a number of issues common to bourses in developing nations, such as a regular lack of liquidity in the form of a shortage of willing buyers and sellers in the market and a short list of blue chip stocks, it also clearly offers enough of a value proposition that international investors are willing to overlook these elements of concern.
The operators of frontier markets – those with a smaller market capitalisation and liquidity than more developed bourses in emerging economies – typically want to overcome liquidity problems to attract foreign capital, but Oman does not need its stock market for that reason. Instead, the authorities are hoping that a more mature market will help the country achieve other goals.
Oman is working toward a more diversified economy in which the public sector can step back and let the private sector drive growth, and one in which Omanis can find a greater number of job opportunities in the private sector that are more attractive than government positions. The stock market is seen as a tool that can help reach these goals by deepening and broadening the financial services sector.
Progress toward a bigger stock market can be seen in overall market capitalisation: in 2008 it amounted to 33.9% of GDP at OR7.9bn ($20.5bn), and by the end of 2012 that had increased to 38.8% at OR11.67bn ($30.2bn). The current ratio remains below the high of 49% at OR9.09bn ($23.5bn) seen in 2009, before the indirect effects of the 2007-08 crisis filtered through to Oman. Market capitalisation reached OR13.46bn ($34.8bn) at the end of the first nine months of 2013, an increase of 18.8% over the same period in 2012.
One of the main successes in recent years has been in the area of IPOs. New listings are a primary way to achieve market growth and if the recent rate of new listings can be sustained, the MSM may have entered a new era in which IPOs are more common. The government has driven the change via a policy enforced across several government agencies that makes an IPO on the MSM mandatory for companies wishing to open up in some areas of the private sector, including financial services and utilities. There were six IPOs from 2008 to 2012, and activity has picked up since. Two new offerings came onto the market in the first nine months of 2013, and as of the end of the third quarter seven more were expected in the following 12 months, with 2014 set to bring an uptick in offerings.
The latest batch of IPOs included Oman Arab Bank (OAB), the last of the local lenders that had still not listed. The lender expects to complete the sale in early 2014, depending on market conditions. The IPO is also significant because OAB successfully appealed to the Capital Markets Authority (CMA), the sector regulator, for an exemption from a rule that at least 40% of a company’s value must be offered in an IPO.
OAB’s market capitalisation will be 25% of its overall value, and the investment community in Muscat expects that more companies will be asking the CMA for similar treatment, and perhaps even a complete revision of the current requirements.
In the future, more listings of other types of securities would complement the increased pace of IPOs. “The capital markets in Oman must focus on new listings, depth and the diversity of instruments such as mutual funds,’’ Hassan Ahmed Mohsin, the CEO of the Muscat-based investment firm Horizon Capital Markets, told OBG. “At the moment low-value stocks are being ignored. A valuation of the MSM would increase the amount of good stocks in the market.’’
Broadening the Market
Alongside such efforts to further broaden the market have been an increased regulatory presence by the CMA. The government is maintaining a sharp focus on transparency, both in reporting and in the access of minority shareholders to management through annual general meetings. Firms that offer funds or asset-management services are required to provide more details to clients about the securities and funds on offer, including forward projections of rates of return with explanations to justify their expectations. Regulators at the CMA have also sought to keep out the influence of excessively speculative or risky trading. Margin lending, which entails borrowing from a bank to buy stocks, is tightly controlled and advanced instruments such as short-selling and complex derivatives are not expected to be allowed any time soon.
The approach is consistent with the overall regulatory strategy across all financial sectors in Oman. The Central Bank of Oman (CBO) regulates banks, while the CMA, oversees the markets and insurance sectors. Both are considered market oriented in their approach, seeking to enforce existing regulations but avoiding establishing too many of them.
Size & Scope
There are a total of 125 equities available on the MSM, according to the exchange’s website, and they are grouped into three sectors: financial services (34), industrials (50) and services (41). Eight government bonds are traded and 11 corporate issues. Five of the bonds are from Bank Muscat, the country’s largest bank, and only one comes from a company outside of the financial services segment. That bond was offered by Renaissance Services, which owns and operates a fleet of offshore vessels that serve the oil and gas industry. Additionally, 14 mutual funds are listed.
Among stocks nearly 40% of market capitalisation is found in the financial sector and nearly 36% in the industrials and services groups. It has not always been so balanced – prices of financial stocks were sluggish 2012 and the first half of 2013 while the industrials climbed, narrowing the gap in what has historically been a market dominated by financials. In November 2013 this shifted slightly in favour of the services sector as its share rose to 32.1% against the industrial segment’s 18.5%.
“The MSM is driven by the industrial and services sectors. This is a unique characteristic as most capital markets are driven by the banking sector. Diversifying and deepening the market will attract and facilitate local and foreign investment,” Mohsin told OBG. The financial services sector is comprised mostly of banks, as just two insurers had sold shares publicly as of the end of the third quarter of 2013. In the future, however, licences for financial services are expected to be conditional on offering an ownership stake to the public via an IPO – a draft for a new insurance law includes this stipulation, for example. Therefore, the mix is expected to change in the near future, as rules introduced in 2011 allowing for participation by sharia-compliant banks and insurers have created an appetite for new ventures.
The MSM 30, which comprises the 30 most liquid companies in the market based on free float is rebalanced quarterly. No single listing can make up more than 10% of its value. Three sector-specific indices for financial services, industry and services contain the top 15 companies in each segment. As of the third quarter of 2012 only Oman Telecommunications (Omantel), the country’s largest telecoms provider, had merited a 10% weighting, while the other stocks with a 5% share of the benchmark or more included telecoms provider Nawras, Raysut Cement, and four banks, namely, the National Bank of Oman, Bank Muscat, Bank Sohar and Bank Dhofar. The latter two banks had announced merger talks in July 2013, with the new entity expected to have assets totalling OR4.1bn ($10.6bn) and market capitalisation of around $1.8bn.
For buy-and-hold portfolio investors, the MSM has shown growth over long-term periods. According to figures from the bourse, the MSM 30 closed 2012 at 5760 points, just a few percentage points shy of a four-fold gain in the past 10 years. The high point in that period was 2007, when the benchmark’s value was 9035. Long-term growth in Oman has tracked the rise in oil prices worldwide, even though there are few stocks on the index directly involved in the oil and gas industry. Petroleum production accounts for slightly less than half of GDP in Oman, but the market is dominated by financial services and industrial concerns. The benchmark’s financial services companies rose 3.73% on the year in 2012, and finished it with prices at a price-to-company book value ratio of 1.34. Meanwhile, industrial shares surged 24.4%, finishing the year at a price-to-book level of 1.34, and services stocks climbed by 14.57% and ended 2012 with a price-to-book ratio of 1.81.
Opening New Avenues
New at the outset of the third quarter of 2013 was an index created to track sharia-compliant stocks. The MSM Sharia Index as of September 2013 contained 32 stocks that comply with sharia law according to the guidelines set by the Accounting and Auditing Organisation for Islamic Financial Institutions, a Bahrain-based, standards-setting organisation for Islamic finance.
Overall, foreign ownership of MSM stocks climbed in 2013, to 27.6% as of the third quarter of that year. Investment from abroad had peaked in 2008 at 33%, before plummeting to 23% as Europeans in particular faced cash calls at home in reaction to the debt crisis that developed there, before beginning to climb again in 2013. The current share is just off the global average of 30%, according to CMA calculations, indicating that some Omani stocks have international appeal. Only about five companies on the exchange trade often enough and represent corporations large enough to be considered suitable portfolio investments for fund managers worldwide. However, having more stocks to trade could also mean more trading activity as well as increased overall economic activity. “From the global perspective Oman’s economy is doing well,” said Pradeep Asrani, managing director of the Muscat-based investment firm Gulf Baader Capital Markets. “The markets will benefit from capital inflows coming from emerging and frontier markets such as East Africa.”
While government policy has helped to create a pipeline of new stocks, similar progress is yet to be seen for debt securities. The government does not have a regular schedule for debt issuance, and short-term debt notes traded between the CBO and the country’s banks – used by the latter to mop up excess cash in the system and by the former to balance its books on a short-term basis – are not debt securities but certificates of deposit instead.
However, there seems to be a growing consensus in Oman that the government could benefit from issuing more bonds. The sultanate does not need the money, but sales would help develop a corporate bond market as corporate bonds are typically priced by noting what government bonds yield and offering a slightly higher return, depending on the firm’s credit risk. The government has been considering selling a dollar-denominated sovereign bond in 2014, which would be the first since 1997 and the second in the country’s history. Darwish Al Balushi, the minister of finance, told local media in May 2013 that it would be intended to help benchmark debt prices to facilitate private sector offerings.
Corporate debt is currently constrained by the lack of a developed market, as well as several legal issues, such as the need for clarifications on how bond holders would be treated in the case of bankruptcy. That concern could be solved by amending the commercial legislation to ensure that the relevant sections of the Capital Markets Law provide for a legal environment in which bond holders are guaranteed a claim on a bankrupt entity’s assets before equity investors, said Taimur Malik, counsel at the law firm Curtis Oman. Regulators are also aiming to provide assurances that bankruptcies will be dealt with promptly. The average time has fallen from four to two years, according to the CMA.
Another indicator that the pace of development in debt markets may soon increase is the emergence of Islamic banking and insurance, which is expected to create demand for sukuk, the sharia-compliant alternative to bonds. Islamic banks and insurers use them to aid in managing short-term accounts and as investments. Sukuk issues will be easier once the legal framework for sukuk and overall total, a mix of pension funds and insurance companies, and one high-net-worth individual. Al Madina and Bank Nizwa were the lead arrangers in the issue, though Bank Dhofar and Qatar International Islamic Bank also assisted in the process as joint lead managers. The Al Madina sukuk was a private placement and not an IPO, but the sale is expected to allow the securities to be tradable on the MSM. In the future, however, offers open to the public may well depend on the legal framework. The expectation is that prospectuses for bonds and sukuks will not need to be as comprehensive as those for equities, and that a lower level of disclosure could translate into private firms preferring debt over equity.
There are now three Islamic investment vehicles for equities in the sultanate’s Islamic funds market. The Vision Al Khair GCC Fund was established by Vision Investment Services in the first quarter of 2013, and had around OR10m ($25.9m) in assets under management as of early December 2013. Ahli Bank opened one shortly afterward that has amassed about OR3.5m ($9.06m), and the newest entrant from the National Investment Funds Company ( NIFCO) had OR2.7m ($6.9m). In each case these funds are investing in companies operating businesses that are considered sharia compliant.
Institutional investors play a large role in Oman’s market, and 2012 saw a rise in their overall investment. Combined, these large-scale funds accounted for OR8.3m ($21.5m) in additional ownership after the first quarter of 2012, and in the second quarter they scooped up another OR11.5m ($29.7m). Additional institutional activity boosted trading volumes on the year, which were 82.4% higher in 2012 than in 2011. One potential reason for this is that pension funds have increasingly divided their equity holdings into core and trading portfolios. The latter have created additional activity as well as provided opportunities for investment firms. Pension funds have been ceding active management control over some of the assets in those trading portfolios to investment firms and typically offer this option to companies with a specific investment mandate. Pension funds are a relatively fragmented market, with 12 funds in Oman serving various groups of employees. For example, the Royal Oman Police has its own fund, as do each of the several branches of the military. Additional funds handle the pensions of civilian employees.
For several years in the late 2000s there had been talk of merging some of these funds together, and when in 2012 it seemed unlikely to happen, some pension funds moved assets from highly liquid securities or banks back into equities, explaining the activity in early 2012. The idea behind merging had come from a move towards harmonising the pension benefits accruing to Omanis.
Omanis working for the government can retire with benefits after 20 years of service and collect 80% of their salary, which is capped at OR2400 ($6216) per month, while nationals working in the private sector are covered by the Public Authority for Social Insurance, which offers benefits for those 60 years of age or older at a rate of 2.5% of a worker’s final salary per year served.
Another state-owned institutional investor, NIFCO, was set up in 1998, amidst a market crash, to buy stocks to support the market. At that time the government and several pension funds contributed OR45m ($116.5m), and the company has since grown into an investment firm with $400m in assets under management and three closed-end funds in operation. NIFCO’s first Islamic fund, Al Kawthar, was open-ended and Sheikh Rashid Saif Al Saadi, the firm’s CEO, told local press that he expected the fund to exceed the minimum benchmark of OR2m ($5.18m). The issue ended initial subscription in early August 2013.
There are 21 brokers in the Omani market. The top five generally have a market share of 50%. The two largest are United Securities and Bank Muscat, which had market shares of 16.3% and 11.9%, respectively, in the third quarter of 2013. Brokers typically handle custodian services and while this can create conflicts of interest, investors can avoid it by using HSBC’s Securities Services, which does not offer brokerage services. In addition, clearance and depository roles are handled by the Muscat Clearance & Depository Company.
The MSM has benefitted in recent years from the government’s heightened commitment to IPOs in the form of obliging winners of new licences in the financial services sector to list, as well as making it a part of the tendering process in the downstream utilities sector. This has created a pipeline of new listings that could be extended and expanded through a sustained commitment by the public sector, including privatisations of government agencies via IPOs. Investors active in the market would be the primary beneficiaries, but as plans for the segment are realised and developed this should eventually expand to include the Omani economy as a whole.
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