Growing activity on the bourse reflects new optimism in the market

In 2013 the Kuwait Stock Exchange (KSE) saw increased trading activity and, according to many local players, rising investor confidence across the board. Over the year market capitalisation at the bourse grew by nearly 7%, largely on the back of the strong-performing consumer services, technology, and oil and gas sectors. The jump in value and trading volume at the KSE in 2013 can be attributed in large part to the exchange’s steadily improving operating and regulatory environment since early 2010.

Indeed, the introduction of the Capital Markets Law (CML) in February 2010 has had a major beneficial impact on Kuwait’s overall investment environment. “Oversight, transparency and business practices have improved dramatically over the past four years,” Issam Alusaimi, a technology and development advisor at the KSE, told OBG in early 2014. “That said, we are still in the early stages of the transformation project. Over the next four years I expect the exchange to continue to develop and expand.”

Performance In Figures

By the end of 2013 market capitalisation at the KSE had reached KD31.11bn ($109.4bn), up around 7% from KD28.9bn ($101.62bn) at the end of 2012, according to data published by the Kuwait Projects Company’s (KIPCO) Asset Management Company (KAMCO), a local financial services company. Similarly, the KSE price index jumped by more than 27% over the course of the year, up considerably from growth of just 2% in 2012 and a 16% drop in the price index in 2011. Indeed, 2013 was only the second year that the KSE has ended the year in the black prior to the international economic downturn of 2007-08, which had a negative impact on market sentiment and activity throughout the entirety of the Gulf region, including Kuwait.

Trading volume and value at the KSE has also jumped substantially over the course of the year. According to KAMCO data, on average some 516.4m shares worth KD45.47m ($159.87m) were traded on a daily basis in 2013, up from 331.28m shares worth KD29.08m ($102.25m) in 2012; and 155.87m shares worth KD24.63m ($86.6m) in 2011. In 2013 daily trades at the KSE averaged 8912, up from 4811 in 2012 and 2510 in 2011, for example. This increase in activity reflects rapidly improving investor confidence in Kuwait and elsewhere in the region in recent years.

Major Players

Most of the recent expansion at the KSE in 2013 can be chalked up to substantial growth among smaller stocks. Indeed, the Kuwait 15 Index (K15) – which comprises the top 15 listed companies according to an equation that takes into account both market capitalisation and liquidity – made up 65% of the total value of the KSE at the end of 2012; by the end of 2013 this figure had fallen to 53%. The K15 index – which is made up primarily of banks, financial services companies and telecommunications service providers – declined in value by around 12.4% over the course of the year, from KD18.9bn ($66.45bn) at the end of 2012 to KD16.6bn ($58.4bn) at the end of 2013. Meanwhile, the value of the remaining 181 KSE-listed companies has increased by around 45%, from KD10bn ($35.16bn) as of the end of 2012 to KD14.5bn ($50.98bn) as of the end of 2013, according to KAMCO data.

It is moreover important to note that the decline in the value of the K15 in 2013 can be largely attributed to the changing make-up of the index itself, as opposed to a drop in value at constituent companies. Indeed, in an effort to ensure that the index always included the largest listed firms, the KSE removed and replaced companies on the K15 a handful of times over the course of the year. Regardless, the slight contraction of the value of the K15 (and the expansion of the rest of the market) highlights the fact that much of the recent expansion in the market has taken place largely among small-cap firms.

The consumer goods sector led the market in 2013, growing 47.3%, according to KAMCO. This was followed by the technology sector, which grew by 26.9% over the course of the year; the oil and gas industry, with growth of 26.1%; the basic materials sector, up 23.2%; and the health care sector, up 22.1%. Major contributors to the growth of the consumer goods segment include the Livestock Transport and Trading Company, a government-controlled consumer meat producer, which saw its market capitalisation grow by 54.3% in 2013; Americana Group, a privately owned operator of fast food and casual dining restaurants, which saw its market cap expand by 48.6% in 2013; and the Palms Agro Production Company, a private agricultural firm, which saw a 41.7% expansion in its market cap on the KSE in 2013. Americana, incidentally, became one of the top-10 largest firms listed on the exchange over the course of the year.

The single-largest contributor to the expansion of the market in the technology sector was Future Communications Company Global, a privately owned holding company with investments in telecommunications equipment, which reported a market cap increase of 84.5% in 2013. Other major technology players include Hayat Communications and Al Safat TEC Holding, both of which expanded more than 25% over the course of the year. Major growth drivers in the oil and gas industry include Gulf Petroleum Investment, the National Petroleum Services Company and the Energy House Holding Company.

Source Of Activity

The jump in activity can be attributed in large part to rising levels of optimism among individual Kuwaiti traders, who make up the majority of market participants, and, to a lesser extent, traders from GCC nations such as the UAE and Saudi Arabia. However, the extent to which the jump in activity over the course of the year is reflective of a larger market recovery remains unclear. “The market is taking an upward trend, but most of the transactions are based on speculation,” Salah Sultan, a Kuwaiti economist, told KUNA, the state news agency, in the second quarter of 2013. “The blue chips are moving slowly and these equities are the real indicators of the market recovery, contrary to current concentration on small- and medium-cap equities.” Despite the flurry of small-cap trading in 2013, at the end of 2013 the KSE’s largest listed companies dominated the market in terms of overall value. According to KAMCO data, by the end of January 2014 the top 10 largest listed firms accounted for 49.4% of the KSE’s overall market cap, while the three largest companies – namely the National Bank of Kuwait, Kuwait Finance House and the telecommunications conglomerate Zain – made up 32.6% of the exchange’s total value.

Changing Demographics

Most activity on the KSE can be attributed to individual retail investors, the majority of whom are nationals. According to data from the KSE, in 2013 individual Kuwaiti traders placed 51.7% of buys and 54.3% of sells (both by value). Domestic institutional investment companies made up just over 16% of both buy and sell orders at the KSE over the year, while other Kuwaiti entities made up an additional 23% on both sides. In total, more than 91% of all value traded on the KSE in 2013 was transacted by Kuwaitis, while around 2% was carried out by GCC nationals and the remainder was overseen by foreign individuals and other foreign entities. "Kuwait needs to shift its focus to entrepreneurship and private sector outflow, by supporting and enabling the youth in building small and medium-sized enterprises, and highlight opportunities in the private sector," Maha Al Ghunaim, chairperson and managing director of Global Investment House, told OBG.

While the percentage of non-Kuwaiti involvement in the exchange remains relatively small overall, many market participants expect to see an uptick in foreign investment in the coming years. “Recently we have seen a slight rise in foreign interest in local securities,” the KSE’s Alusaimi told OBG. “As more reforms are put in place and corporate governance continues to improve among listed companies, we hope to see an increase in foreign participation in our market, particularly in research and innovation.” Attracting new investors is a key goal of the reform programme that was initiated in 2010. The KSE continues to face a number of challenges on this front. Wassim El Hayek, the vice-president of alternative investments at KAMCO, told OBG, “Local individual investors dominate the market and trade primarily based on news flow. This is a major source of volatility in the market.”

While the CML as well as other initiatives and legislation over the past four years have had a positive impact on corporate governance, it remains to be seen whether or not reforms will be able to lead to a change in investor profile. The privatisation of the KSE – which at time of publication was set to take place before the end of 2014 (see overview) – was widely expected to act as a catalyst for growth in the market, as was the impending introduction of derivatives products (see analysis). “Kuwait is a frontier market, so we do not have a very high level of foreign involvement,” said Alusaimi. “That said, we are currently in the midst of a major period of transition, which has the potential to completely transform the market, bringing it in line with the best international practices.”