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Boursa Kuwait slowly regaining lost luster
September 15, 2018, 4:40 pm

Kuwait Stock Exchange, which has wobbled from one crisis to another throughout its history, appears to have found more stable ground in recent years. After having swayed from an all-time high of 8300.51 in May of 2013 to a record low of 4936.51 in January of 2016, Kuwait market was the top performer among the six-nation Gulf Cooperation Council (GCC) bloc in 2017.

Supported by high-level participation from foreign institutions and GCC investors, the Kuwait Price Index was up by 11.5 percent in 2017 while the Kuwait Weighted Index climbed to 5.6 percent. Consumer spending that began recovering in 2017 also resulted in improved market confidence, which reflected positively on corporate earnings that climbed 16 percent to US$4.5 billion in 2017, up from the $3.8 billion a year earlier.

In terms of valuation in 2017, Kuwait traded at a Price-to-Earnings (P/E) ration of 15.2, which was only second to that of Saudi Arabia in the GCC region. In the first-half of 2018, the Kuwait market continued its winning streak to become the second-best performer in the GCC, again trailing only behind the much larger Saudi Arabian TASI index.

Plans by leading global investment index compilers to upgrade Kuwait from its position as a Frontier Market to Emerging Market status have also helped boost stocks in Kuwait Stock Exchange. The market exuberance reflects a well-established pattern witnessed whenever an index provider announces plans to elevate a bourse in the region.

When MSCI recently upgraded Saudi Arabia to Emerging Market status in its Annual Classification Review, this immediately drove the Saudi TASI index higher by 1.9 percent in June leading to the Tadawul All Share Index rallying by 15 percent in the first half of the year. In September 2017, market index provider FTSE announced the upgrading of Kuwait’s bourse from a Frontier Market to an Emerging Market.

This upgraded status, which is expected to happen in two phases in September and December of this year, is already reflecting positively on the market. In addition, the announcement by the other leading index compiler MSCI to place Kuwait in its 2019 Annual Market Classification Review for a potential upgrade to Emerging Market status is also playing well with the market.

Based on realistic timelines, the earliest Kuwait Stock Exchange would be included in the MSCI Emerging Market Index would be by May-2020, nevertheless, the euphoria surrounding the announcement has already helped push all indices up in the green during June of this year.

Promotion to the Emerging Markets Index by leading market compilers could potentially mean billions of global investing dollars being linked for the first time to Kuwait’s economy. To put it in perspective, there are 30 Exchange-Traded Funds (ETF) tracking Emerging Market benchmarks on MSCI and FTSE, just the three largest of these ETFs have between them assets worth roughly $135 billion. In contrast, there are just two Frontier Market ETFs with a total asset base of around $600 million.

It is salutary that trading on Kuwait’s storied exchange, the oldest and once the largest in the region, is slowly regaining its standing in the area and with international markets. It is worth noting that the history of share trading in Kuwait predates the advent of a formal stock exchange.

The National Bank of Kuwait (NBK), which is the country’s first indigenous bank was established as the region’s first shareholding company in 1952, with a capital of 13,100 shares each valued at 1,000 Indian Rupees (The currency then used in Kuwait).

Though a law was passed in 1962 to formally organize the country’s stock market, not much was done to push the initiative forward. Then, in the 1970s, during the oil-boom years, large surplus funds in the hands of investors found their way into the local informal exchange. Incompetent traders and concomitant impetuous trading resulted in a crash that the government then had to step in to bail out the debtors.

Though plans for a more structured stock exchange were initiated in 1977, a formal Kuwait Stock Exchange was established only in 1983, and then too, only after the country witnessed its worst financial crisis — the Souk Al-Manakh collapse in 1982. In the early 1980s, Kuwait’s local exchange, dominated by wealthy merchants who traditionally traded only among themselves, remained off-bounds to many newly-monied young investors, who then began trading among themselves from the Souk Al-Manakh.

The highly speculative and completely unregulated trading at one time commanded a market capitalization that was the third highest in the world, only behind that of Japan and the United States, and well ahead of more mature markets such as that of the United Kingdom or France.

When the market crashed as a result of postdated cheques that could not be redeemed, the government once again belatedly stepped in and closed down the market, while reportedly selectively bailing out a few debtors. At the time of its collapse, it was estimated that there were more than 6,000 investors in Souk Al-Manakh holding postdated cheques worth more than US$90 billion.

Repercussions from the Souk Al-Manakh crash reverberated not only through Kuwait’s economy, but also pushed the whole Gulf region into a recession that lasted for over a decade. In 2010, following years of bickering and wavering, Kuwait’s parliament finally approved the establishment of the Capital Markets Authority (CMA).

The Authority was tasked among other things to monitor, regulate and supervise all securities activities in the country, as well as to achieve transparency and fairness, observe listed companies’ execution of corporate governance regulations, and protect investors from unfair practices. In 2014, the CMA established Boursa Kuwait, a revamped and renamed Kuwait Stock Exchange, as its wholly-owned entity responsible for managing the securities market operations.

The establishment of Boursa Kuwait has been heralded as the first step in the eventual privatization of the bourse. After what has been a long but not-so-illustrious history, the various structural and administrative reforms implemented in the past few years appear to be bearing fruit. However, the recent market buoyancy notwithstanding, the fact remains that Kuwait’s economy, which is overly dependent on hydrocarbon revenues, is highly undiversified.

This, along with the lack of any meaningful private-sector participation in the economy, the country’s unsustainable public sector employment, and Kuwait’s contentious parliament, are unlikely to foster confidence among investors and remain impediments to any long-term flow of passive or active funds into Boursa Kuwait.

- Staff Report

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