Kuwait: Upward trajectory for KSE

The Kuwait Stock Exchange (KSE) had a positive start to 2013, with the index steadily moving up to reach multi-year highs in May. While local investors are driving much of the recent activity, foreign capital is increasingly flowing into the Gulf’s third-largest bourse. Plans to privatise the exchange could also boost the KSE’s international profile.

As of mid-May, the KSE’s main index was above 8000, having risen more than 40% since the beginning of the year, data from Bloomberg show. According to international media reports, domestic interest in small-cap stocks has been largely responsible for the rally.

In an interview with state news agency KUNA, Kuwaiti economist Salah Sultan expressed a similar opinion. “The market is taking an upward trend, but most of the transactions are based on speculation. 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,” he said.

A report released in mid-May by Al Shall Economic Consultants agreed, attributing the sharp jump in liquidity in part to speculative activity. According to Al Shall’s analysis, the average daily trading value for the first four months of 2013 rose by 62% over the average for 2012. While the report cited other factors, such as low interest rates, an increase in real estate prices and the relatively low price of Kuwaiti shares since the global financial crisis, it also noted evidence of “harmful trading”.

According to the report, the KSE’s 30 most liquid companies accounted for about two-thirds of trading during the four-month period. While some of these were large listings – the group combined made up about half of total market capitalisation – trading was dominated by smaller stocks. Indeed, 21 of these listings represented just 3.3% of the market but captured nearly half of the trading value.

Local investors buying and selling small-cap stocks may be behind some of the recent movements in the market, but an uptick in foreign capital inflows is also a factor, according to Mustafa Behbehani, an economist interviewed by KUNA. “The market rises are driven by the influx of liquidity, whether from Kuwaiti or foreign traders,” he said. Other experts told KUNA that foreign investment is particularly coming from Saudi Arabia and the UAE.

Reform of the stock market in recent years – including the creation of the Capital Markets Authority (CMA), which has been active since 2011 – may have played a part in attracting more foreign investors. Historically, trading on the KSE was dominated by local retail investors, which contributed to volatility in the run-up to the global financial crisis in 2008.

The influx of foreign traders is a promising development, one that suggests regulatory reform may be having the desired effect and that the KSE is starting to make the challenging transition from a “domestic and retail” to “foreign and institutional” investor profile. Another step that could further the evolution of the stock market would be its privatisation.

In 2012 the CMA signed an agreement with HSBC Bank Middle East to oversee the privatisation of the KSE. Under the terms set out by the government, 50% of the exchange was to be sold to listed companies, with the balance offered to Kuwaitis via an IPO. However, the process hit a hurdle later in the year when it was discovered that a clause in legislation establishing the CMA prevented the agency from conducting commercial activities. To avoid any conflict, parliament would need to vote on an amendment to the act governing the CMA, a step that has yet to be taken.

In a recent interview with OBG, Saleh Al Falah, Chairman of the CMA, said privatisation is a project of the “utmost importance”, pointing out that “it is well known that private stock exchanges are better run than public exchanges.” While noting that the process is “moving slower than planned”, he added that the regulator is working to “make sure things are done properly.”

Privatisation could indeed make the exchange more competitive, but Kuwait faces other challenges that may ultimately discourage foreign investors from taking a look at the KSE. These include a national development plan that has been slow to roll out, as well as political tensions between parliament and the government.