A combination of low economic growth, fiscal tightening and high interest rates produced relatively weak results on the Amman Stock Exchange (ASE) in 2011, with low levels of trading and new entrants. Despite reduced market sentiment, bright spots included an increase in the share of foreign investment and a growing sense that many of the blue chip stocks with solid results remain undervalued, indicating prices are being affected by low investor confidence rather than fundamental concerns. The exchange regulators, for their part, are using this comparative lull in activity to revise regulations to enhance the specialisation of investment products and create a more sophisticated investment environment.
EXCHANGE FUNDAMENTALS: As of the end of 2011, there were 247 companies listed on the ASE, down from 277 in 2010, of which 233 witnessed trading activity during 2011. Comparing 2011 with 2010, trading volumes declined from 6.99bn shares traded to 4.07bn. The value of shares went down by 57% on the 2010 amount to JD2.9bn ($4.08bn). This compares to the exchange peak in 2008, when JD20bn ($28.1bn) of shares were traded.
According to data from the ASE, domestic market capitalisation dropped from JD21.9bn ($30.77bn) in 2010 to JD19.3bn ($27.12bn) in 2011, resulting in a capitalisation-to-GDP ratio of 102.7%. Average daily turnover declined from JD26.8m ($37.66m) to JD11.5m ($16.16m) over the same period. The share turnover ratio also decreased to reach 58.2% during 2011, compared with 102.2% in 2010. For the first two months of 2012, market capitalisation fell further from JD19.3bn ($27.12bn) to JD18.8bn ($26.42bn), with average daily trading of JD8.3m ($11.66m) down on the average for 2011. Of the 233 companies that traded that year, 95 were traded on the first market and 138 on the second market.
Trading in 2011 remained concentrated among the top 10 listed companies, which accounted for 42% of the total value of trading and 71% of the total market value. As of February 2012, Arab Bank was worth JD3.8bn ($5.34bn) and made up 20.1% of market capitalisation, followed by the Arab Potash Company with JD3.5bn ($4.92bn) and 18.8%, the Housing Bank for Trade and Finance with JD2.1bn ($2.95bn) and 11.3%, Jordan Telecom with JD1.4bn ($1.98bn) and 7.4%, and Jordan Phosphate Mines Company with JD941m ($1.32bn) and 5%. Overall, the market had a tough time as 169 listed companies saw their share prices decline and only 60 companies witnessed an increase. Four had no change during 2011. The number of suspended stocks rose to 17, while the number of delisted stocks reached 32. Two new companies were listed on the exchange.
EXCHANGE GOVERNANCE: There are three key institutions responsible for running and overseeing capital markets in Jordan. The ASE is a private not-for-profit company responsible for running the market. The Securities Depository Centre (SDC) oversees settlements and maintenance of ownership records. A government institution, the Jordan Securities Commission (JSC), provides regulation and is responsible for developing and monitoring the market.
There are two tiers of markets in the stock exchange to provide investors with a clear differentiation of status between registered companies. The first market requires companies to have made a pretax profit for at least two out of the three years before being listed, and to reach requirements for the free float and number of available shares. The second market has lower barriers of entry and allows companies to list their shares as soon as they obtain the right to operate from the Ministry of Industry and Trade. There are forthcoming plans to add a third market to provide further segmentation between companies (see analysis).
SECTOR BREAKDOWN: According to analysis by local investment bank AB Invest, sector performance was down across the board, indicating broad political and economic factors were responsible for the decline. By secondary index classifications, nearly all sectors lost value. Electrical provision companies performed least well, losing 48.6% over 2011, mostly due to the 70% drop in the share price of Middle East Complex, which announced debt rescheduling in March 2012. The transport sector lost 40.1%, mostly due to the weak performance of Royal Jordanian Airlines, which reported a net loss of JD42.4m ($59.58m) by the third quarter of 2011. The flagship carrier’s stock dropped by 57% over the course of the year. Listed diversified financial firms lost 43.6%, due to several companies’ stocks being suspended or delisted.
The only sectors that saw a rise in share prices during 2011 were tobacco, with an increase of 19.5%, textiles up 2.8%, technology up 2.8% and printing, which saw a marginal rise of 0.9%. Tobacco consists of two stocks, and sector growth was due to the 24% rise in Eqbal Investment Company’s share prices.
COMPANY HIGHLIGHTS: Top traded shares in 2011 were Middle East Complex, where volumes reached 537m shares, with high rates of selling that depressed value by 68%, while Arab Bank had a value of JD175m ($254.91m). Al Tajamouat for Catering and Housing was just behind, with 192m traded shares. Despite relatively good third-quarter results, the share value of the banking sector took a hit over 2011 as investor confidence waned amid an increase in non-performing loans. Despite the poor performance of stocks, third-quarter results released by the sector show that of the 13 banks reporting results, only one turned a loss.
Banking is the largest sector on the ASE by market capitalisation, revenues and asset size. Revenues increased by about 4% to reach JD1.58bn ($2.22bn) for the first three quarters of 2011, net income reached JD409m ($574.63m) and total assets JD45.5bn ($63.94bn). Arab Bank, Jordan’s largest bank and second-largest trade company by value, reported net income of JD217m ($305m) in the forth quarter, an increase of 13% on 2010. Despite these results, Arab Bank’s share price dropped by 21% over 2011. The only bank to see a rise in stock performance was Societe Générale de Banque Jordanie, with a 9.2% rise in stock performance. This provided some recovery from the 18.7% decline in share value in 2010.
The real estate sector, meanwhile, suffered in 2011, with results for the third quarter showing nine out of 17 companies did not make profit, although this was an improvement on 2010, when only four of these companies turned a positive result. Amad Investment and Real Estate Development, which sells residential apartments, increased revenue to JD7.2m ($10.12m) and saw a JD800,000 ($1.24m) rise in profits. As a result, stock performance improved by 22% over 2011. Specialised Investment Compounds (SPIC), which is engaged in the construction and selling of industrial and commercial buildings, saw its revenue decline by 41% to JD2.1m ($2.95m) in the third quarter of 2011, resulting in a net loss of JD2.7m ($3.79m). Over 2011 SPIC’s share price dropped by 72%.
KEY DRIVERS: Just as the economy appeared to be recovering from the 2008 global financial crisis, domestic and regional pressures severely damaged investor confidence. This led to the ASE general index ending 2011 down by 15.9%. The period between 2008 and 2011 is considered by many to be one of correction following the overvaluation of shares between 2005 and 2008, when prices were far higher than book value. This was caused by a surplus of cash entering the market, with a great deal being driven by real estate projects that forced prices up regardless of real value.
Entering 2011, the correction seemed to have bottomed out, and industry analysts were beginning to suggest that some shares looked undervalued given the strong fundamentals of some stocks before the events of the Arab Spring took hold. However, disruptions in the kingdom’s supply of gas from Egypt, crucial for electricity generation, forced the government to import oil at a much higher cost. In an already tight fiscal climate, the government issued bonds to the local market to finance these energy purchases. Local banks, which have ample liquidity, bought the bonds at high rates of interest. The Central Bank of Jordan issued a three-year bond in August 2011 with a coupon of 7.3%, nearly 3% higher than in January of the same year. While this was good news for bonds, it was not for stocks.
The move effectively increased competition for capital, draining money out of the market that could have been used for investments in businesses to create real value and growth. Instead, capital has taken the guarantee of high rates offered by government bonds and gone to finance already heavily subsidised energy supplies. Growing public debt and rising interest rates have also forced the private sector to accept higher rates on loans, again hindering lending and growth.
CLEANING UP: Corruption scandals involving several listed companies posed another challenge to investor confidence in 2011. Industry analysts told OBG the scandals further depressed values and reduced the appetite for new investment opportunities in the exchange. Those investors still active on the ASE were reportedly showing increased interest in the individual owners of prospective investments to ensure they were not buying into potentially contaminated stocks.
The highest profile allegations have been centred on privatisation deals executed over the last 20 years. The largest being the Jordan Phosphate Mines Company, which was accused by the Jordan Anti-Corruption Commission (JACC) of signing deals with shipping companies with family connections to senior company figures. Although Jordan’s Lower House of Representatives voted against JACC’s recommendations to refer key political figures to trial, nonetheless the chairman, Walid Kurdi, still resigned in March 2012. Over 2011 the company lost nearly 25% of its share price value on the exchange.
In addition, in late 2011 the Ministry of Industry and Trade’s Companies Control Department referred 16 public shareholding companies to the prosecutor general for registering company land in the name of board members, which would violate legal guidelines that protect the rights of shareholders in these properties. All companies had been given grace periods to reregister the land but had failed to do so. While some industry commentators told OBG this was beginning to look like a witch-hunt, others said that by taking a tough stance, the government was showing investors there were strict auditing processes in place to protect interests.
REGIONAL COMPARISON: Stock exchanges across the Arab region suffered almost universally, with only Qatar emerging from 2011 with an increase in market value over the year. Countries that experienced the most domestic turmoil suffered the worst slumps, particularly Egypt and Bahrain, which lost 49.3% and 20.2%, respectively, during 2011. GCC countries fared only slightly better, with the Dubai Financial Market Index down 17% over 2011, Abu Dhabi down 11.7% and the Kuwait Stock Exchange down by 16.4%. Saudi Arabia’s Tadawul all-share index dropped just 3.1%. Currently only available to domestic investors, the Saudi stock exchange is looking to open its market to foreign investors in 2012. The Qatari Exchange rose by 1.1% during 2011 as investors were cheered by indications of an expanded product offering. A glimmer of hope for the long-term effects of the Arab Spring was provided by Tunisia, where the market’s main index, the TUNINDEX, ended down just 7.6% during a remarkable 2011.
FOREIGN OWNERSHIP: A rise in foreign ownership was one positive outcome for the ASE in 2011, as non-Jordanians increased their share in the exchange from 49.6% to 51.3% of market capitalisation between 2010 and 2011. In total, foreign investors bought shares worth JD555.8m ($781.01m) representing nearly one-fifth of all trading value. This reflects the strategic and long-term nature of foreign investment in the exchange as a far smaller proportion of foreign trading occurs compared to outright ownership.
During economic downturns, investors tend to concentrate on core businesses in their own countries and withdraw exposure abroad. However, because most foreign investments in the ASE are strategic stakes in large key companies, the exchange is less susceptible to inflows and outflows of “hot money”. Arab investors hold 65.6% in value of all non-Jordanian investments, with Lebanese and Saudis leading the way. As a sign of the perception of the investment climate from abroad, investments from the US declined in 2011.
PUBLIC OFFERINGS: In contrast to the boom years leading up to 2008, the ASE had only one public offering in 2011, that of the Northern Cement Company. The placement, managed by Arab Financial Investment Company, issued 2.75m public shares and a private placement of 1.125m shares to Sama Al Yamamah Company and the same amount to Diyar Najd for Contracting and Trading. Saudi Arabia’s Northern Region Cement Company owns 83.8% of the listed shares.
The slowdown in initial public offerings (IPOs) appears to reflect several factors. First, with investors seeking the safety of bank deposits, there is less liquidity available for investment in the market. Second, investors may be nervous to buy into a market that may not have bottomed out yet. Third, it could be argued that by 2008 the majority of companies intending to go public had already done so and that there are not many candidates left. Finally, some analysts interviewed by OBG questioned many previous IPOs offered by start-ups with limited track records, and said that the lack of market confidence had a silver lining, in that it prevented these sorts of offerings.
Regionally, markets across MENA raised $853m in capital through the IPO market in 2011 – a decline of 69% from a total of $2.8bn raised in 2010. Morocco, relatively calm domestically and unaffected by regional events, had four IPO issuances, Tunisia one and Egypt none. GCC countries accounted for 93% of all capital raised on the IPO market in the region. Saudi Arabia took 53.9% with five issuances, followed by three in Abu Dhabi and one in Oman. By sector, industrial manufacturing in MENA raised the largest proportion of capital, at 30%, followed by real estate with 27% and retail with just over 12%. The highest amount of capital raised through a single offering was that of Eshraq Properties Company, a real estate firm, which raised $225m on the Abu Dhabi Stock Exchange and accounted for 63% of the total capital raised in the GCC during 2011.
MARKET DEVELOPMENTS: Taking advantage of a lull in trading activity, the three institutions responsible for running and overseeing the market – the ASE, the SDC and the JSC – are working to revise the regulatory framework to accommodate the development of new investment vehicles. Investors have increasingly sophisticated needs, and the regulators know they must introduce new products while ensuring regulation remains smart and compliance is enforced.
One long-awaited measure is the introduction of mutual funds, which would counter a trend of trading in low-price speculative stocks for buying stocks based on valuations and company fundamentals (industry analysts told OBG that many of the blue chip stocks on the ASE remain undervalued). No legislation has yet been passed, but establishing appropriate regulations would support initiatives being taken by Jordanian investment houses such as AB Invest, which plans to establish a mutual fund to attract foreign investors to the market. Although funds can be opened in the kingdom, complex laws and regulations make it difficult for them to operate. As a result most open-ended funds run by Jordanian investment houses are registered outside the country, mainly in Bahrain.
The trading of bonds or fixed-income securities, meanwhile, looks likely for 2012 as the Jordanian government focuses on liquidity boosting initiatives. New listing and IPO rules for the secondary market should improve the listing process and encourage newly established small and medium-sized enterprises to enter the exchange.
POSITIVE STEPS: The market regulators are taking positive steps to introduce new products within a difficult environment (see analysis) where the image of publically traded investments is still under scrutiny. It is likely new regulations will be issued when an equilibrium is found, and new products introduced gradually so that institutions can source the right specialists to run and manage more sophisticated tools.
OUTLOOK: 2011 was tough in many respects, and it seems likely that 2012 will be a year of preparing for recovery in 2013. The main restraining factor forecast for 2012 is slow macroeconomic growth, which is likely to compromise company performance and reduce attractiveness for long-term investments. High interest rates create a squeeze on capital, which further pressures companies to offer high yields or pay higher rates of interest on loans, reducing profitability. The government’s tight fiscal situation reduces its ability to deal with large-scale fiscal shocks, and it is likely that further recourse to issuing bonds will drain more capital from the market and reduce lending to businesses.
On the positive side of the ledger, many listed companies are profitable and have sound fundamentals. Undervalued stocks should find their real worth as investors look for long-term returns. The possible introduction of new products would also generate more interest and increase the range of tools available to savvy investors. Following four difficult years, 2012 looks set to be a turning point for the stock exchange as investors ready themselves for stronger expansion towards the end of 2012 and into 2013.
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