Boursa Kuwait loses 27% of liquidity in 2016

KUWAIT: During 2016 Boursa Kuwait lost about 27.5 percent of its liquidity versus 2015 during which it lost -35.2 percent versus 2014 liquidity. Liquidity during these three years was originally weak and is continuing weak. What is being circulated currently about likely measures of governmental intentions to intervene by injecting liquidity to purchase stocks, i.e. stimulating the demand side, or intervene to purchase to create support, is a repetition of the same old sins. The impact will be temporary and most funds will go into the wrong direction. The resulting funds will be withdrawn from the market and market conditions will return to a worse condition than before.

Trust abatement over nine years needs a professional vision but not a provisional stimulus injection. Assuming that the government is willing and able to inject one billion Kuwaiti dinars liquidity, the amount is slightly less than 4 percent of the market value of listed companies; its cycles, i.e. multipliers, will be short-termed with a temporary impact. The disappearance of the impact will be followed by more abatement of trust. All former similar experiments failed. The only exception was when the government focused more on the supply side and reduced the volume of stocks supply, or planned withdrawal of a large number of companies from trading starting in 1986.

By the end of 2016, the number of listed companies was voluntarily reduced to 184 companies down from 217 listed on 09/06/2011. The share of 95 companies (49.7 percent of listed companies including 7 companies withdrawing during the year) scored only 2.8 percent of the market liquidity.

The negative impact affected the confidence in the Boursa Kuwait significantly. If intervention is inevitable and funds are available, a professional effort is required to purchase the biggest number of non-liquid companies at lower prices and a comfortable margin from the real prices, after study and evaluation, and it is fine if prices offered are slightly higher than the market prices.

Such a procedure is investment that achieves return to public fund that is capable of waiting for some time and capable of exerting effort to restructure some of these companies financially such as merging and liquidating most of them. The human resources of KIA is capable of performing this and it will acquire a lot of experience and capability through it. The supply reduction will limit demand on good listed companies which will reduce investment risks at the Boursa Kuwait and lifts the confidence level and creates a better operating environment for the market making companies who would start their awaited work. It might be incredible what is currently being circulated about intentions of the intervention of the national fund, but we are with intervention without repeating previous failed experiences. Reduction of confidence has been quite long, the economic and geopolitical conditions are tough and 2017 year envisages to start a continued contracting monitory policy-lifting interest rates. Pressure on lower liquidity and consequently assets prices will continue. Intervention is supposed to be planned and professional to stop the transfer of assets price crisis to the banking sector; if that happens its confrontation cost will be several multiple.

Monetary and economic Indicators

The periodical statistical bulletin of the Central Bank of Kuwait from July to September 2016 published on its website provides some economic and monetary indicators whose developments deserve follow up and documentation. For instance, the balance of trade -commodity exports minus commodity imports-, achieved surplus in the third quarter of 2016 in the amount of KD 1.422 billion with Kuwait commodity exports during this quarter scored about KD 3.736 billion of which 88.9 percent were oil exports. Value of commodity imports -excluding the military- scored about KD 2.314 billion. The balance of trade achieved surplus in the first quarter of this year in the amount of KD 417 million, and KD 1.199 billion in the second quarter. This means the balance of trade achieved a surplus in the first three quarters of this year of about KD 3.038 billion, or about KD 4.051 billion for the entire year. This surplus is lower by -41.8 percent than its counterpart in 2015 in the amount of KD 6.964 billion.

Consumers prices during the third quarter achieved positive growth by about 1 percent. Their average scored 142.3 (2007=100) rising from 140.9 in the second quarter which is tolerable. This growth is attributable to the dominance of the impact of rising transportation prices (due to lifting subsidy from gasoline prices in September 2016) from an average of 123.2 to an average 128 (+3.8 percent) for the same period, and the rise in restaurant and hotels prices from an average of 140.4 to an average of 144.1 (+2.6 percent) for the same period.

The bulletin indicate continued rise of the weighted interest rates of balances on deposits to about 1.641 percent in the third quarter from 1.631 percent in the second quarter of this year, rise rate by 0.6 percent in the quarter and the weighted interest rates of balances on loans remained stable at 4.466 percent for the same period. Volume of private sector deposits at local banks scored about KD 34.131 billion (KD 34.659 billion in the second quarter), a quarterly drop rate by -1.5 percent, on the other hand, claims on private sector increased to KD 36.619 billion up from KD 36.195 billion in the end of the second quarter achieving a quarterly growth rate by 1.2 percent.

GCC States and a different era

Throughout 8 years from the oil market prosperity era (2006-2013), GCC states increased their public expenditures at a compounded annual growth rate of 15.2 percent without listening to any advice to stop the non-recommended financial expansion that the prosperity of oil market will not be for long.

Neither did they learn from a painful similar experience they encountered after their financial expansion between mid-1970s and their end. It is almost two and half years since oil market has entered its recession cycle. With the high level of their public expenditures, the higher ceiling which a barrel of oil might possibly score in the future is below the breakeven price of most budgets. They have become forced to cover the financial deficit by barrowing or withdrawing from reserves in addition to compressing their expenses with consequences that are not acceptable by the public general.

The only merit for the oil market prosperity era was that despite extravagant spending, most of them managed to achieve surpluses that increased its sovereign funds which scored about US$ 2558 billion on 30/06/2016 according to Sovereign Wealth Funds Institute report issued in September 2016. Despite the huge figure, its distribution among 6 GCC states and the late developments to their various funds puts these states in different positions in terms of the duration that their sovereign funds can provide to secure their financial stability.

The UAE sovereign fund -most of it belong to Abu Dhabi- scored $ 988 billion on 30/06/2016 according to the above source. Its volume between June 2015 and June 2016 increased by $ 32 billion perhaps due to the prosperity of global stock markets during that period. The Saudi fund, the second, in the amount of $ 598.4 billion as of in 30/06/2016 lost in one year about $ 70.6 billion i.e. dropped from $ 669 billion on 30/06/2015 to about $ 598.4 billion on 30/06/2016.

The third largest sovereign fund in the region is the Kuwaiti fund which remained constant at $ 592 billion between June 2015 and June 2016. Perhaps the reason is due to the fact that withdrawing does not come directly from future generations reserves but is carried on the general reserve and will subsequently influence the future generation fund. The biggest addition during a year belonged to the Qatari sovereign fund whose volume rose to $ 335 billion on 30/06/2016 from $ 256 billion on 30/06/2015. The source did not give any justification for this substantial addition of US$ 79 billion in a year weak in revenues.

A completely different category, which includes Oman and Bahrain, has small sovereign funds. This would reduce significantly the timeframe of their capability to absorb the oil market shock. The Omani sovereign fund, although its volume rose to $ 34 billion on 30/06/2016 from $ 19 billion on 30/06/2015, remains equal to 10.1 percent of the volume of the Qatari sovereign fund in the region. The Bahraini fund has $ 10.6 billion only. Therefore, and taking into consideration the size of the sovereign fund, the size of public expenses, and seriousness of reform efforts in each estate, we can rank the six states in accordance with their ability to absorb the Oil market shock as follow: UAE, Qatar, Kuwait, KSA, Oman and Bahrain.

In the end we have to mention three remarks. First, those figures are attributed to their source and we cannot confirm their accuracy. Second, those funds of whatever size do not guarantee the sustainability of the financial condition for any of the six states unless most of their public expenses are funded from their own revenues only and not by deductions from their assets or barrowing by their guarantee. Third, success in confronting the oil market requires very essential and innovative solutions without excluding anyone from fair contribution of its share from its burdens.

Comparative Performance of Selected Stock Markets 2016

2016 ended and December performance was largely positive and included most sample markets, with 12 markets achieving big gains, while two markets only achieved negative performance, one very slightly. This positive and strong performance was sufficient to enhance the gains of the 7 winning markets since the beginning of the year until the end of November. It also promoted the performance of 5 losing markets in the end of November to the positive zone with the end of December. That positive performance occurred despite the beginning of rising interest rates started, for different justifications. While the Gulf region markets prospered because of oil agreement which lifted prices by more than 20 percent in less than a month and by more than 100 percent compared with January 2016 rates while other markets gained because of better-than-expected economic performance indicators. The biggest gainer in December was the German market which gained about 7.9 percent in one month; this was adequate to take it from the negative zone in the end of November compared with its level at the beginning of this year and about 6.9 percent gain at the end of the year.

The second biggest gainer in December was the Qatari market with approximately 6.6 percent gains and were adequate to move it from the negative zone at the end of November to the positive zone in the end of December, though very marginally for 2016 not exceeding 0.1 percent. Abu Dhabi, Muscat and Dubai Markets all achieved gains in December by more than 5 percent and strengthened their positions in the positive zone, i.e. they achieved more gains in 2016.

The British market led the list of winning markets in 2016 with approximately 14.4 percent gains, perhaps to make up for the pound sterling losses in large part. The USA market came second with 13.4 percent gains despite the gains of the US dollar. Dubai market came third by 12.1 percent gains. While the Indian market made a slight loss in December by -0.1 percent, it did not affect its continuation in the positive zone and achieving gains by 1.9 percent in 2016. The Chinese market achieved the highest losses in December by around -4.5 percent which strengthened its position in the bottom of the losing markets by about -12.3 percent in 2016.

The weighted index of Boursa Kuwait associated it in the negative zone although it achieved gains by about 3.5 percent in December as it remained losing by -0.4 percent in 2016 while the price index of Boursa Kuwait settled in the positive zone rising by 2.4 percent since the beginning of the year.

January will witness transition of power to President Trump and although this transition raises a lot of concerns arising from the prospects of tension in the economic and political relations on a global level, we believe that their effects, if any, will not show up on the performance of markets in the same month. Nevertheless, we believe that the hotness of December was an exception which will not recur in January. Therefore the performance in January will be fluctuating, either positive weak or negative weak.

Weekly performance of Boursa Kuwait

The performance of Boursa Kuwait for the last week (4 working days due to the New Year holiday), was more active compared to the previous one, where all indexes showed an increase, the traded value index, the traded volume index, number of transactions index, and general index, AlShall Index (value weighted) closed at 369.5 points at the closing of last Thursday, showing an increase of about 6.5 points or about 1.8 percent compared with its level last week, which is the end of 2016.