Gulf’s SoE heavy stocks outshine S&P GCC index

Better diversified

KUWAIT CITY, June 14: Marmore MENA Intelligence, a subsidiary of Kuwait Financial Centre “Markaz”, recently released a report titled ‘SoE heavy stocks in GCC’, analysing the holdings of state-owned entities (SOEs) in GCC companies and their performance in the stock markets.

SoEs, such as social security and pension funds, sovereign wealth funds (SWFs), ministries and governments themselves are important institutional investors in the GCC stock markets. An analysis of publicly listed stocks in GCC reveals that 74 SoEs have invested in 172 publicly listed companies, for an overall investment value of USD 261bn, or approximately 28% of the total market capitalization in GCC markets.

The top 15 stocks with SoE holdings are named ‘SOE heavy stocks’, as they account for 74% of the total SoE holdings in GCC markets, and are from three GCC countries: Saudi Arabia, Qatar and UAE. As expected, Saudi Arabia dominates the portfolio with a share of 64%, as it has the highest market capitalization in the region. The other expected trend was how GCC SoE invest only in large-cap companies, barring Bahrain and Oman, where they have invested primarily in small caps.

Five companies among the SoE heavy stocks have 75% or more of their shares held by one or more SOEs. Among them, Saudi Telecom Company had 84% of its shares held by SoEs, which was followed by Saudi Electricity Company and DP World, with SoE holdings of 81% and 80%, respectively.

Public investment fund (PIF), General Organization for Social Insurance and Public Pension Agency lead the charge in KSA, with PIF holding 70% stake in SABIC; the largest holding among SoEs in the GCC. Dubai World holds 80% in DP World, making it the second largest SoE, in terms of investments, after Investment Corporation of Dubai. Qatar Investment Authority has all its investments in three Qatari banks, viz. Qatar National Bank, Qatar Islamic Bank and Qatar International Islamic Bank, among which 90.4% of its investments are in Qatar National Bank.

If we were to group these 15 stocks as a portfolio (say, SoE heavy stocks), they have both performed better, were less volatile and were better diversified than say the S&P GCC index. In terms of performance for the period 2012-16, SoE Heavy Stocks Portfolio returned 11.7% (annualized) while the S&P GCC Composite Index returned 1.6% (annualized) yielding a significant out performance of 10% (annualized). In terms of sectors, oil and gas and telecom companies in the GCC account for 46% of the SoE heavy stocks. During 2011–2014, the oil and gas companies, and companies in allied sectors, such as petrochemicals and industrials, were able to reap better profits, owing to the high oil price (around $100/ barrel). GCC companies enjoyed cost advantage, as they were able to obtain fuel at subsidized cost. This led to better financial and stock performance of these companies during 2011–2014, though they faced headwinds in 201516. During that period, performance of telecommunication companies made up for the downfall of oil stocks.

In terms of market capitalization, KSA has 64% of the investments in the portfolio of SoE heavy stocks compared to its share in the S&P GCC composite index at 51%. After KSA, Qatar has the highest share in the SoE heavy stocks (22%), whereas it accounts for 15.1% in the S&P GCC composite index. UAE’s share in SoE heavy stocks stands at 14%, lesser than its weightage in the S&P GCC index (18%), as large-cap companies such as EMAAR properties do not have SoE holdings, but they form part of the S&P GCC composite index. SoE heavy stocks do not have any investments in Kuwait, Oman and Bahrain, although these countries have a share of 10%, 2.9% and 2%, respectively, in the S&P GCC composite index.