REGIONAL MARKETS CARRY HEAVY LOAD AND MISS OUT ON BONANZA
Reforms and big-name IPOs were dominant themes for regional stock markets,
Stock markets in the UAE and the wider Arabian Gulf missed out on the bumper year for the US and emerging market equities in 2017, as sluggish macroeconomic growth and geopolitical uncertainties in the region weighed on investor sentiment. US stocks experienced an annus mirabilis, on the back of an improving economy, a proactive monetary policy from the Federal Reserve, the prospect of corporate tax cuts in 2018 and improving jobs data this year. The S&P 500 advanced steadily into record territory throughout the year, and finished the year up around 20 per cent.
Emerging market equities had an even better year, with MSCI’s emerging equity benchmark adding 34 per cent as investors cashed in on attractive valuations and made up for their relatively light positioning following significant outflows from 2013-15.
“The rally has been led by the uplift in global trade, underpinned by a synchronised recovery in global growth, and US dollar depreciation,” said Tom Wilson, the head of emerging market equities at Schroders in the asset manager’s emerging market equity outlook for 2018.
“This environment has supported an improvement in corporate return-on-equity and positive earnings surprises.”
Such a lift was not enjoyed within the GCC, owing to a combination of a “slowing economy, regional political and diplomatic tension and some unforeseen events”, according to NBAD Securities. While all seven of the region’s main indexes closed up for 2016, two – Bahrain and Kuwait – finished 2017 in the black and Saudi Arabia ended the year flat.
Qatari equities finished the year worst off, after Saudi Arabia and the UAE cut off economic and diplomatic ties with the country in June. The Qatar Exchange shed 18.3 per cent for the year, making it one of the worst performers of the year globally.
The region’s runaway star performer was Boursa Kuwait, which ended the year up 11.48 per cent. The market enjoyed its brightest performance in the first half of the year, in anticipation of the country’s elevation to secondary emerging market in FTSE Russell’s indexes from September.
Passive inflows into the bourse as a result of the upgrade could reach as much as US$700 million following the upgrade, Husayn Shahrur, the managing director for Middle East North Africa at NBK Capital, said in October.
Stocks in Dubai and
Abu Dhabi ended the year down 4.55 per cent and 3.25 per cent respectively, with trading volumes for the year hitting their lowest level since 2012.
“People this time last year were suggesting that it might be a more resilient economy to weather the downturn of oil prices, and indeed that has proved to be the case,” said Tarek Fadlallah, chief executive at Nomura Asset Management Middle East. “However, the stock market has really not performed very well.”
In Saudi Arabia, Tadawul, the largest market in the region by market capitalisation, ended the year 0.22 per cent higher.
The sluggish performance of UAE and Saudi bourses came in spite of significant reforms introduced by the countries’ bourses to bring themselves more in line with international best practices.
The Tadawul changed its settlement cycle to T+2, launched the parallel Nomu secondary market and introduce short-selling. The Saudi Capital Market Authority and the Saudi Arabian General Investment Authority announced plans in October for a framework allowing foreigners to own 10 per cent or more of publicly traded companies.
The regulatory and structural reforms come as Saudi Arabia works to ensure it is included in index provider MSCI’s widely tracked Emerging Markets Index. MSCI placed the Tadawul on its watchlist for inclusion in 2017, with a formal status upgrade widely expected in June 2018, ahead of actual inclusion in 2019. Such an inclusion may result in passive inflows of about $38 billion, according to analysis from financial services firm State Street.
The new measures also form part of Tadawul’s modernisation efforts ahead of an anticipated share float this year. Kuwait and Oman are planning similar privatisations of their bourses, but have yet to discuss their timelines.
Short-selling was also introduced by Abu Dhabi and Dubai stock exchanges, albeit on a controlled basis, in selected stocks.
More importantly, both bourses had their first significant initial public offering in several years, with the listing of Emaar Development and Adnoc Distribution in November and December, respectively.
The share sell of Adnoc Distribution, the first Adnoc subsidiary to list, passed off well, with shares trading higher compared with their listing price at the end of the year.
Emaar Development, by contrast, has struggled since its debut on lingering concerns around Dubai’s property market; its shares fell sharply on debut, and are trading 15.6 per cent below par at the end of the year.
There will be other IPOs to follow in 2018 in the UAE; Mubadala is expected to list shares in Emirates Global Aluminium, but has yet to decide where. Last month, Dubai’s Union Properties said it planned to float shares in its facilities management unit in the second half of the year.
These potential IPOs pale in comparison, however, with the mooted IPO of about 5 per cent of Saudi Aramco this year; the oil firm’s chief executive Amin Nasser insisted in October that the share offering, to be split between Saudi Arabia and an as yet undecided international bourse, remains on schedule for the second half of the year, even as several questions remain about what could possibly be the world’s largest share offering ever.
Beyond Aramco’s listing, the outlook for local equities remains mixed for 2018. An anticipated improvement in the region’s economic growth, linked to higher expectations for crude prices, bodes well for Arabian Gulf stock exchanges, where there are cheaper valuations compared to their emerging market peers, according to NBAD Securities.
Saudi Arabia’s anticipated inclusion in MSCI’s Emerging Markets Index will draw increased levels of international funds to stocks in the kingdom and the wider region, the firm predicts.
But investors following Saudi Arabia may remain cautious, as the ramifications of the kingdom’s crackdown on corruption play out in the wider economy.
“Domestic political developments in Saudi Arabia, related to the corruption crackdown, adds another layer of uncertainty to the investment case for Saudi Arabian equities,” according to EFG Hermes.
“While some might see the crackdown as positive, in terms of reforms, it might affect local … sentiment; thereby, reducing their activity in the local market or turning them into bigger sellers of local equities.”
Equities in the UAE, meanwhile, may struggle to ignite investor interest again, in spite of a more attractive economic climate forecast for the year, according to the Cairo bank.
“The UAE market is cheap and is currently trading at a discount to both EM and Mena, which we think is unjustified; however, we fail to see clear catalysts for the market that would make us change our neutral stance.”