Is the $10.5bn Gulf IPO pipeline resilient to market woes?

Stock markets are driven by fear and greed, those animal instincts that make commerce a rough game and investment perilous at times. Only a year ago GCC stock markets were reeling from serious market crashes, and let us not forget that the biggest bourse in Saudi Arabia is still more than 50 per cent down on its all-time high.

Indeed, it is arguable that the constant and unabated stream of IPOs in the Kingdom in 2007 is one reason why the main market has not shown a bigger recovery.

In fact, IPOs across the GCC were up by 40% in 2007 over 2006 and raised a total of $10.5bn. Saudi Arabia raised $4.8bn against the UAE's $5.1bn. However, as the Gulf Capital report notes oversubscription levels fell to 6.3 times in 2007 and average appreciation stood at 201%.

Money makers

Gulf investors still see IPOs as a sure-fire way to make money and they have seldom been disappointed. Ajman Bank is set to be the latest successful example. The exception to the rule was the $5bn Dubai World IPO on the fledgling Dubai International Financial Exchange which trades substantially below the issue price.

But IPOs are fickle beasts. They can be pulled even after they have been launched, like the Nanodynamics IPO on the DIFX last month. Companies can also decide to postpone for many reasons, like the Al Qudra Holding decision to delay its IPO until new UAE regulations allow it to offer less than 55% in the sale.

So when a forward book of $10.5bn in IPOs is declared this is not set in stone. The biggest hurdle that these IPOs may face is a shift in market conditions.

The stock market recovery has been more pronounced in the UAE than in Saudi Arabia but both markets remain nervous and volatile and liable to a big sell-off at the slightest whiff of negative news, local or global.

US recession

If the US declares an official recession then global stock markets will surely tank and as January showed, local stocks will follow â€' if only because so many UAE shareholders are now foreign. And if global oil prices slump in a reaction to this news then again GCC bourses will react negatively.

On the other hand, there is a great determination in the regional business community to keep the flow of IPOs moving. It is a question of the greed factor overcoming the fear factor of an issue failing, and immense regional liquidity.

For the moment the DP World IPO on the DIFX can be dismissed as an aberration in a newly constituted bourse. However, if an IPO were to perform in this way on an established local bourse then the impact on investor confidence would be immediate and devastating for future IPOs.

See also:
Hard to see much upside for UAE stock markets
IPO rush set to drain GCC stock market liquidity
Saudi bourse opens up to foreign investors