Kuwait Stock Exchange looks to claw back ground

The past 12 months have not been easy for the Kuwait Stock Exchange. Close to Kd250m ($833.9m) was lost from the market’s capitalisation, while the value-weighted index dropped by 3.1% for the year, according to figures from the National Bank of Kuwait. These developments went hand in hand with a fall in trading volumes in 2014, with a daily trading average 44% lower than 2013, at Kd29m. The collapse in global oil prices played a part in this dynamic, as it did across equity markets in the Gulf Co-operation Council (GCC).

“Last year was particularly tough for Kuwait’s equity market. The Kuwait Stock Exchange performed poorly in relation to other GCC markets. In recent years, a lack of government spending has really dented investor confidence in the country. The market has been trading sideways for the majority of the past three years because we have been dealing with negative investor sentiment,” says Jasem Al Zeraei, vice-president of brokerage at local financial services firm NBK Capital. 

Crisis of confidence

This fall in investor confidence is the product of the political and economic stagnation experienced until mid-2013, when gridlock between the government and parliament meant that few infrastructure and development projects were approved. In the second half of 2014, this negative investor sentiment was compounded when oil prices began their six-month slide.

“The local bourse lost ground in 2014. The decline in oil prices towards the end of the year drove all regional markets into a serious correction. [By the] fourth quarter of 2014, all indices lost ground as the drop in oil prices became more sustained,” notes a National Bank of Kuwait research report. 

The impact of political instability in Iraq was also felt, with advances made by the terrorist group Islamic State hitting the Kuwait Stock Exchange hard in the middle of the year. “The Kuwait Stock Exchange Index dropped by about 5% throughout June, corporate bond yields rose, and some observers have expressed fear about a newly destabilised neighbour, which could increase the likelihood of sectarian strife,” says Steffen Dyck, senior vice-president of ratings agency Moody’s.

On the rebound? 

Nevertheless, the past 12 months have also brought significant change to the Kuwait Stock Exchange. In recent years, small-cap stocks have tended to dominate trading activity on the bourse, a trend that has partly emerged as a result of the preponderance of retail investors engaging with the market. Yet, this looks set to change in the near term as various external pressures caused investors to invest in larger cap stocks.

“Traditionally, most investment was geared towards small caps, but we saw a seismic shift in investment preferences in 2014. There was a massive exodus of investors dumping small-cap stocks and buying into larger market players, including the banks,” says Mr Al Zeraei. “There are two reasons for this: first, the capital markets authority has enforced a more rigorous transparency regime, which smaller companies have to abide by, and second, following the oil crash, investors began to buy heavily into larger and established stocks. The illiquid bond market and low interest rates left them with few other options."

In addition, listing of the stocks of Kuwaiti telecoms operator, Viva, in December 2014 has added about 14% to the exchange’s daily market liquidity, and the prospects for further initial public offerings (IPOs) appear to be strong. “We are now seeing a healthy appetite for IPOs and I know a number of investment companies that are looking to take some good companies public in the next two years. As this happens, we expect liquidity and market capitalisation to grow,” says Mr Al Zeraei.

While the Kuwait Stock Exchange has faced a difficult year, most observers hold an optimistic outlook for the market. Data from Kamco, a local investment firm, indicates the market made a modest recovery in the first months of 2015. The Kuwait Stock Exchange weighted index increased by 0.7% month on month in January, while the Kuwait 15 index grew by 1.2%.

“A strong pipeline of mega projects and the government’s commitment to maintain spending is restoring confidence to the market. I think equities are fairly cheap and can only go up from here considering the country’s prospects and the amount of money the government is spending,” says Mr Al Zeraei.