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 Exclusive: GCC IPO and capital market outlooks for 2019 revealed

2018 was a down year for GCC IPO and stock market activities. Which GCC countries will bounce back and which won't?

The oil price slump, poor liquidity, placed pressure on the GCC stock market IPO activity, in volume and value, slowed down in the GCC in 2018 Jan 30 saw the launch of the MSCI Tadawul 30 Index, a tradable index.

Rising oil prices in 2018 helped shield GCC countries from lackluster performances on both the IPO side and capital market performances.

Some countries did better than others in 2018, but the following report identifies the key factors driving the growth of these 2 sectors in 2019.

Overall review  

In an interview with AMEinfo, Fadi Nwilati, CEO, Kaizen Asset Management Services, said: “Various factors have contributed to the GCC stock exchanges volatility. The rise in US interest rates triggered a rate hike by the UAE Central Bank causing investors to drift away from UAE equities in 2018. The oil price slump, poor liquidity also placed pressure on the GCC stock market while a (US-China) trade war and geopolitical developments remain major concerns and will likely continue to create stock volatility.”

On the maturity of local markets, Nwilati added that UAE's (as well as Saudi in 2019) inclusion in the MSCI – Emerging Markets Index has helped bring more attention and interest to the GCC region from global investors and funds.

“Saudi Arabia and the UAE had more than 30 companies in the IPO pipeline in 2018. The main IPOs which were highly anticipated were Abu Dhabi Ports, Sanaat, Gems Education and Emirates Global Aluminium ahead of the Aramco (2021) sale,” he said.

“The GCC stock market is maturing and investors confidence will improve if a few bottlenecks are removed relating to economic factors and IPO performance. Overall, the Corporate IPOs led the primary market (in 2018) compared to REITs leading the way in 2017. Unique business models, industry classification and capital efficiency should continue to assemble increased interest from both the local and international investors looking at IPO participation.”

Finally, Nwilati concluded that trading activity in the GCC will be tracked by the oil price movement. “The oil market has seen positive reinforcement by OPEC which will help decrease the oil market volatility in the latter part of 2019,” Nwilati said.

“The AED9.2 billion ($2.5bn) government infrastructure projects spending in 2019 is also bound to be beneficial for the stock market. The GCC stock market overall will see a mild recovery due to pressure on fundamentally strong real estate and construction stocks.”

Saudi Aramco IPO

The kingdom plans an initial public offering for 5% of Aramco in 2021, Saudi Energy Minister Khalid al-Falih said, and hoping for a $2trillion valuation to raise $100bn.

A recent independent audit confirms the kingdom controls more than 260 billion barrels in oil reserves, 2nd globally to Venezuela.

"This certification underscores why every barrel we produce is the most profitable in the world, and why we believe Saudi Aramco is the world's most valuable company and indeed the world's most important," Falih said in a statement.

Ahead of the IPO sale, Aramco plans to buy the 70% SABIC share that Saudi’s Public Investment fund owns and valued at roughly $70 billion, to project a more complete upstream/downstream picture of the oil giant.

IPO performance 2018

IPO activity, in volume and value, slowed down in the GCC in 2018 and companies will look to oil prices and secondary equity markets before going public in 2019, Kamco Research said in a research note, UAE daily Khaleej Times reports.

The total number of corporate IPOs and real estate investment trust (REIT) IPOs declined to 18 issuances last year compared to 28 in 2017, raising $3.3bn against $2.7bn, respectively.

Corporate IPOs led primary markets in 2018, contributing 56% to the number of issuances and 62% of capital raised, according to the report.

Saudi contributed 11 IPOs (8 REITs at $1.04bn) and accounted for $1.33 billion worth of capital proceeds in 2018.

Dubai-based companies raised capital through IPOs on international exchanges.

Bahrain had its first IPO for four years following the flotation of port operator APM Terminals Bahrain, which raised $31.5 million in December, according to Zawya.

IPO activity will be restricted by traditional capital funding through bank loans as is the tradition with family-owned businesses in the Gulf region.

Saudi tradable index MSCI Tadawul 30 

MSCI, a leading provider of indexes and portfolio construction and risk management tools and services for global investors, and the Saudi Stock Exchange (Tadawul), the largest stock exchange in the GCC region in terms of market capitalization and turnover, announced on Jan 30 the launch of the MSCI Tadawul 30 Index, a tradable index, as reported by BusinessWire.

The MSCI Tadawul 30 Index initially comprises the 30 largest securities listed on Saudi Arabian Equity Market. Individual securities are capped at a maximum 15% weighting in the Index.

Tadawul was in 2018 upgraded to ‘Emerging Market’ status by both index providers, FTSE Russell, and MSCI and ended with a yearly gain of 8.31%, according to Kuwait Financial Center Markaz.

The index will provide investors with a useful benchmark of the largest liquid companies in Saudi Arabia and serve as the basis for the development of an index futures contract listed on Tadawul.

Saudi will enter the MSCI Emerging Markets Index in two phases this year, with the first phase set to coincide with MSCI’s May 2019 Semi-Annual Index Review in June.

GCC Capital market outlook 2019

Markaz’s outlook on GCC markets for the full year of 2019 revealed that GCC economies witnessed a sizeable increase in oil revenues with only Bahrain and Oman running twin deficits in 2018.

Kuwait – Positive

Kuwait was upgraded to emerging market status by FTSE Russell’s index in September 2017 and is expected to create a fund inflow of close to $3-$6bn into the stock market, according to Markaz.

Earlier in 2018, Boursa Kuwait divided into three segments designed to incentivize companies to improve liquidity and transparency. Moreover, it launched an over-the-counter trading platform, becoming the first Arabian Gulf exchange to offer stocks of unlisted companies.

Kuwait is trading at a Price-to-Earnings (P/E) ratio of 16, the highest in the entire GCC region. The economy of Kuwait is expected to grow by 4.06 % in 2019 according to the IMF.

Saudi Arabia – Neutral

Media and entertainment sector led the way in earnings growth, with a rise of 38.3% (YoY) in Q3 2018. Banking and telecommunications sectors followed suit, registering 28.9% and 26.6% growth, respectively. Retail, construction, hotels & tourism and transport sectors reported lower earnings in 2018 due to lower oil prices.

Saudi plans to increase state spending by 7 % in 2019.

UAE – Positive

The Dubai financial market (DFM) was the worst performing GCC market for the year 2018, with a YTD loss of nearly 25%. Financial Services were among the worst with 44% in losses. Real Estate and Construction sector, has seen a drop of 39% in 2018.

However, the nine months of 2018 showed UAE corporate earnings up by 13.3% compared to the same period last year. UAE’s GDP growth is expected to be 3.7% higher in 2019 (IMF).

The UAE remained the major destination of FDI inflows at about $11bn in 2017, accounting for 22% of total FDI to the Middle East and North Africa region.

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