Recent milestones sustain the bourse’s forward momentum

The Bahrain Bourse (BHB) was established in 1987 and commenced operations in 1989, with only two stocks trading. By February 2018 the bourse had grown to comprise 43 common stocks, government bonds and mutual funds, and a real estate investment trust (REIT). The market is serviced by 12 brokers, of which three are individuals. SICO is the largest broker in the kingdom.

LEADERBOARD: As of November 29, 2017 the Bahrain All Share Index gained 5.2%, making it second best in the GCC after Kuwait’s increase of 7.8%. Comparatively, Standard & Poor’s GCC Index was down 4%. By February 2018 market capitalisation of the Bahrain All Share Index stood at BD7.8bn ($20.7bn).

Banking and financial services formed the majority of the index, with a combined 76.3%, this was followed by materials, with a share of roughly 11%. Ahli United Bank reported an index weight of about 25%, making it the largest listing on the bourse.

Low liquidity has been a recurring concern among market participants, a likely reason for the large valuation discount Bahrain has historically drawn in comparison to its regional peers. Despite similar returns on equity, Bahrain’s price-to-earnings ratio was roughly 30% lower than that of Kuwait’s, as of November 29, 2017. As an encouraging change, liquidity witnessed a modest reversal in 2017, with the peak in July surpassing the peak of 2013 and broadly revisiting the levels seen in 2009. The average daily traded volume (ADTV) increased by 77% from $1.3m in 2016 to $2.3m in November 2017, with Kuwait being the only other market in the GCC reporting turnover growth in the run up to its Financial Times Stock Exchange upgrade.

The $100m Bahrain Liquidity Fund, a mixture of cash and shares, was launched in June 2016 and aims to make a significant impact on market liquidity, improve valuations and gradually increase the free float of stocks traded on the bourse. Since it first entered the market, the fund has accounted for more than 53% of aggregate market turnover, with the exclusion of block trades.

There remains room for improvement, as ADTV still trails the levels seen in 2014. An improving liquidity scenario is vital for the Bahrain bourse to draw foreign participation, with an eventual goal of qualifying into the MSCI Emerging Markets Index. In October 2017 Bahraini investors represented about 61.5% of the trading value in the market and foreigners accounted for the balance, a trend that has been similar throughout 2017. Better liquidity in the market could also encourage initial public offering (IPOs); the kingdom has witnessed only two between 2010 and 2015, and one – albeit of a different asset class – in 2016.

BRIGHT SPOT: One bright spot in 2017 was the listing of Bahrain’s first REIT by Eskan Bank, of 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). Eskan’s REIT was officially listed on the bourse on January 2, 2017.

In September 2015 the bourse launched the Bahrain Islamic Index, the first in the GCC, which includes stocks of Bahraini listed companies that are compliant with sharia. By February 2018 the index was up 13% and listed 14 sharia-compliant companies.

In October 2016 the BHB announced that it had obtained the Central Bank of Bahrain’s approval on rules related to the Bahrain Investment Market (BIM). The BIM is an initiative of the bourse to enable small and medium-sized enterprises and family businesses to draw capital at a relatively low cost, compared to an IPO, and provide alternatives to a reliance on bank financing. Important steps in this regard were lowering the minimum paid-up capital requirement to BD250,000 ($663,000), easing requirements related to profitability and finalising listing applications within 30 days.

The BIM was inaugurated on March 26, 2017, with government development body Tamkeen appointed by the bourse to support participating businesses by covering costs associated with the listing and assigning them a sponsor that would provide further guidance.