A developing market: Equities

The Bahrain Bourse (BHB) was established in 1987 and commenced operations in 1989 with only two stocks trading. Since then, the bourse has grown to include 41 common stocks (including three closed for trading), government bonds and mutual funds. The market is serviced by twelve brokers, of which three are individuals. The Securities & Investment Company (SICO) is the largest broker in the kingdom.

According to Bloomberg, the market capitalisation of the Bahrain Bourse All Share Index (BHSEASI) stood at BD7.2bn ($19.1bn) at the end of December 2016. Banking and financial services constituted the largest slice of the index, with a weighting of 76%, followed by telecoms, with 7.1%. Ahli United Bank, with a market capitalisation of $4.4bn and 24% index weight, is the largest listing on the bourse. The BHSEASI gained 0.4% in 2016, outperforming only the Qatar’s index’s 0.1% increase. All other GCC indices were higher in 2016. This runs contrary to the strength of the Bahrain economy, which the Bahrain Economic Development Board, in its September 2016 report, estimated would grow by 2.8% in 2016, led by a 3.2% rise in non-oil GDP.

Low liquidity has been a recurring concern among market participants, and a key reason for the valuation discount Bahrain has drawn versus its regional peers. Despite similar returns on equity, Bahrain’s price-to-earnings ratio was 32% lower than Kuwait’s at the end of 2016, reflecting a large liquidity discount. In an encouraging change, the liquidity trend – after deteriorating through 2015 and the first half of 2016 – witnessed a modest reversal. The average daily traded turnover stood at $1.21m in 2016, which was an improvement of 2% over the previous year.

The BHSEASI was the only index in the GCC to record an increase in average daily trading volume (ADTV) in 2016. The ADTV of most other GCC markets fell by 20-30%. The $100m Bahrain Liquidity Fund, a combination of cash and shares, launched in June 2016, has had a role to play, in line with its aim to make a big impact on market liquidity, improve valuations and gradually increase the free float of stocks traded on the bourse. The fund has accounted for 65% of the aggregate market turnover, excluding block trades, since its launch and has boosted the BHB’s turnover by 67% .

There is much room for improvement. ADTV continues to be lower than 2013 and 2014 levels. Improving liquidity is vital for the BHB to draw foreign participation, with the eventual goal of qualifying for the MSCI Emerging Markets Index. Bahraini investors represented around 63% of the trading value in the market and foreigners accounted for the balance, according to the BHB’s December 2016 data. Greater liquidity could also help encourage initial public offerings (IPOs); the kingdom saw only two in 2010-15 and one in 2016.

A bright spot in 2016 was the IPO of Bahrain’s first real estate investment trust (REIT) by Eskan Bank, in which SICO was the lead manager and market maker. The issuance offering value was BD14.4m ($38.2m) and represented 72.9% of the trust’s total size of BD19.8m ($52.5m). The REIT IPO commenced on November 22 and by its closure on December 6 had surpassed a 95% subscription rate. The Eskan REIT was officially listed on the BHB on January 2, 2017. During September 2015 the bourse also launched the Bahrain Islamic Index. It includes stocks of sharia-compliant, listed Bahraini companies and currently has 17 members. In 2016 the index was up 11%, outperforming most regional indices.

In October 2016 the BHB announced it had obtained the Central Bank ’s approval for the rules relating to the Bahrain Investment Market (BIM). BIM is an initiative that aims to enable small and medium-sized enterprises and family businesses to draw capital at a relatively low cost compared to an IPO, and provides alternatives to reliance on bank financing. A key step in this regard was the lowering of the minimum paid-up capital requirement to BD250,000 ($633,000), the easing of the requirements related to past profitability and the the finalisation of listing applications within 30 days.