IPO rush set to drain GCC stock market liquidity

The National Bank of Abu Dhabi expects to manage eight IPOs in the Emirates this year, with three hoping to raise $1.1bn in the first-half: Al Nahda International Education plans a $214m IPO before the end of March; Damas Jewellery is to raise $272m before the end of June; and Abu Dhabi-based Al Qudra Holding's large IPO is expected before the end March.

Meanwhile, Morgan Stanley expects a total of 110 IPOs in Saudi Arabia by the end of next year. And Bakheet Investment Group, a firm licensed by the Capital Markets Authority, has decided to launch the Bakheet IPO Fund to invest in these offerings.
In total Saudi Arabian firms are set to raise $4.5bn in the first quarter from IPOs and rights issues.

Last week Zain Saudi Arabia, the kingdom's third mobile phone company, announced that its $1.7bn IPO was 183 per cent oversubscribed by 8.5 million Saudi nationals. Kuwait based Zain owns 25 per cent of the company, which is paying $6.1bn for Saudi Arabia's third mobile phone licence and plans to start operations this year.

IPO deluge

The Zain IPO will be followed by IPOs from Bupa Arabia, the Saudi Reinsurance Company and Union Co-operative Insurance Company in March, which will raise a combined total of $175m.

And the next $149m IPO in the UAE will be Ajman Bank, which has not yet started operations and is backed by the royal family. It will sell 55 per cent of its shares and follows the shariah-compliant Mithaq Liability Insurance Company, based in Abu Dhabi. It closed its IPO on 4th February 20 times oversubscribed.

The question nobody seems to be asking is whether this flood of IPOs is going to be digested by the markets without causing a drain on liquidity. In short, will investors sell down their existing holdings to buy the new share issues?

In the past, this phenomenon has been noted many times in GCC stock markets. On the other hand, with oil prices and local business confidence high it is plausible to argue that the IPOs will be taken up without depressing the value of existing stocks.

Saudi Arabia arguably deepened the extent of its stock market crash last year by persisting with IPOs, but almost all of them delivered a nice return to investors on Day One.

No alternative

There is also a shortage of investment options overseas this year with global real estate markets down, stock markets falling, bond markets poor and even hedge funds having declared their worst January for eight years.

However, the both the UAE and Saudi Arabian bourses have displayed an increased correlation with global capital markets in recent months; perhaps because of the high involvement of foreign investors in UAE markets, and because of the threat to oil prices in the case of Saudi Arabia.

Therefore, if the US goes into recession and that produces further volatility in global financial markets then the GCC is unlikely to escape, and that might upset this ambitious forward IPO programme. We saw the IPO for Emaar MGF pulled in India this month, and it could well be that some issues closer to home have to be postponed.

See also:
Is the Middle East stock market rally over?
How the Wall Street gloom affects the Middle East
Emaar shares: a case of deja-vu all over again