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Markaz previous research (Managing GCC Volatility) has established the fact that GCC stock markets are the most volatile in the world. Given the growing size and volatility of GCC capital markets, the road ahead is clearly to have a complete market structure that will enable stakeholders cost-effectively raise capital and manage risk. A key missing link in this process, according to the report, is the derivatives segment. GCC stocks markets have remained a "long-only" market for a very long time.
Across the globe derivatives, especially Options and Futures have played a very crucial role in capital market development. The Equity Derivatives market has now reached a size of $114.1 trillion. The presence of strong equity culture along with limitations of GCC capital markets provides a compelling platform for introduction of a derivatives market in the GCC region.
Strategic investors can unlock their potential without diluting their stake. Institutional investors would welcome this as they are familiar with using such instruments for fixed income and other instruments.
GCC markets lack both breadth and depth of the market. In terms of number of companies, GCC region hosts about 550 companies as of the end of year 2006. When measured against the size of the market (market capitalization), it can be seen that the growth in the number of companies is muted relative to the growth in market size. The GCC markets are classified as "long only markets" where trading strategies are limited to "buying when market is expected to go up and liquidating when it is expected to fall down".
In fact the absence of the short-sale activities in such markets does not allow investors to enhance their returns during down trend. Thus investors are left with no choice but to liquidate their positions which on one hand will exacerbate the effect of the downfall while on the other hand will adversely affect the liquidity of the market. The size of the decrease in the liquidity levels is driven to a great extent by the size of the corresponding downfall. Thus if the downfall is very sharp the liquidity could be completely drained- out.
Kuwaiti market during the period 2005 to 2006 is a good example. Although the Kuwaiti market is characterized by the presence of a wide diversity of sectors with a major presence for the blue chip companies such as NBK, MTC, and PWC...etc, the market was not able to sustain liquidity during the correction movement in February 06. Investors as well as fund managers, in the lack of the hedging tools such as the put options, were desperately trying to liquidate their positions while the market was heading down and "draining out" the liquidity with it.
This results in a Domino effect.
Medilyn Manibo, Assistant News Editor
