Kuwait market set to ‘woo’ investors: SICO
Stocks expected to outperform peers
MANAMA, Sept 30: The Kuwaiti equity market is catching the eye of global investors following its FTSE upgrade to emerging market status and its expected reclassification in MSCI’s Emerging Markets Index, reports leading regional asset manager, broker, market maker and investment bank, SICO BSC (c). The Kuwaiti market, up 12% year to date and 17% from its one-year lows, has increased by more than 10% since MSCI announced on June 20 that it may upgrade the nation to emerging-market status next year. Market momentum this year has been driven by foreign inflow into blue chip names such as NBK, KFH, Agility and Zain. Based on both the FTSE and MSCI provision lists of Kuwaiti stocks, these stocks are set to attract the highest amount of flows.
“Kuwait is currently trading at a P/E ratio of around 13 times 2018 earnings, which is conservative in light of the current macro environment and potential earnings growth of about 10% in 2019,” said SICO Head of Equities Asset Management ”Once Kuwait is included in the MSCI Emerging Markets Index, it will most likely see additional passive inflows of approximately $1.5 billion while active inflows could be much higher based on the experiences of other markets that were elevated to this status over the past 10 years.”
Indicating its confidence in the market, the Khaleej Equity Fund, SICO’s flagship GCC equity fund, has positioned itself strongly in Kuwaiti equities in order to take advantage of the foreign inflows theme over the next 12 to 18 months. The fund has produced a return of 18% during the first half of 2018, outperforming its benchmark and peers.
Active investors benchmarked to both the FTSE and MSCI have started positioning themselves ahead of the upgrade, with net foreign inflow reaching $ 400 million in the first seven months of the year. It is estimated that the FTSE’s upgrade will attract $ 900 million in passive inflows over two stages in September and December this year.
“However, it’s possible that the Kuwait market may remain on MSCI’s watch list for longer than anticipated before being upgraded. The UAE and Qatar, for example, were on the list for several years before they were finally upgraded in 2013.
Even if Kuwait’s transition doesn’t happen in 2019, it will still see MSCI-related foreign inflows of around $ 500 million because of its higher weightage in the MSCI frontier market following Argentina’s upgrade to an emerging market,” Sarwar added.
The Kuwaiti Exchange has taken significant steps to increase the market’s attractiveness to foreign investors by upgrading its investment infrastructure. Changes include dividing its stocks into three segments based on market cap and liquidity.
In addition, companies in the premier market have been requested to hold quarterly analyst conferences and make filings in English and Arabic, which is an essential step in opening up the market to foreign investors. The clearing and settlement cycle has also improved following the introduction of a delivery vs payment settlement provision with a buy-in broad mechanism to prevent failed trades. A proper false trade mechanism was also presented, which limited the broker’s access to investors’ custody accounts and the settlement cycle to T+3 for both local and foreign investors. How these changes are implemented and practiced will be an important factor in the market’s upgrade by MSCI.
On the macro front, Kuwait stands on firmer ground given its lowest budget breakeven oil price of only $ 55 versus $ 80 to 100 for most to its GCC peers. In its 20182019 budget, Kuwait forecasted a deficit of $ 17 billion based on an average oil price of $ 50 per barrel, while Brent has averaged over $ 70 so far this year. Loan growth is expected to pick up in 2019 on the back of higher government spending.
According to Kuwait Construction Week, the country has over 700 active projects worth an estimated value of $ 230 billion, of which 58% are under construction. The top construction developments include a USD 12 billion new refinery, a $ 4.5 billion airport expansion, and a $1 billion housing project in South Al Mutlaa City.