New developments in Oman set to change subdued market performance

Oman’s stock exchange, the Muscat Securities Market (MSM), saw an uptick in equity listings in 2014. Although 2015 has been more subdued, several firms have announced plans for initial public offerings (IPOs). Market capitalisation is small by regional standards and the market also has comparatively low levels of trading, although regulatory changes obliging insurance companies to list will bolster the offerings pipeline, as should government plans to relax listings requirements. Moves to develop the sukuk (Islamic bond) market, as well as the likelihood of increased government debt issues as the country enters a period of deficit financing, may also help the bond market – which has seen substantial growth but remains largely illiquid – to take off in coming years.

Market Capitalisation

The MSM’s market capitalisation stood at OR14.6bn ($37.8bn) at the end of 2014, up 3% year-on-year. This represented 30% of Oman’s GDP. Listed companies – of which there were 117 in September 2015 – accounted for 64% of market capitalisation in 2014. Closed companies – which number 189 – accounted for 28% and bonds, of which there were 21, for 8%. At the end of September 2015 market capitalisation stood at OR14.6bn ($37.8bn).

The financial sector was by far the largest by capitalisation in 2014, accounting for 43% of the MSM’s total market cap, followed by telecoms with 18%, power companies (10%), cement and building materials (8%), oil and gas marketing firms (6%), and food and refreshments (5%). The largest listed firm by capitalisation at the end of the year was Oman Telecommunications Company (Omantel) at OR1.271bn ($3.291bn), representing 9% of the market total. The company edged ahead of the sultanate’s largest financial institution, Bank Muscat – which had led the previous year – in second place on OR1.27bn ($3.288bn). Bank Dhofar was third with OR475.5m ($1.2bn). A possible merger (see Banking chapter) with fellow local financial institution Bank Sohar will lead to the creation of a much larger institution should it go ahead, but, based on 2014 figures, will still leave the current two leading firms in the top places.

Foreign investment represents 29.5% of market capitalisation, according to sector regulator the Capital Markets Authority (CMA). Foreign investment is by far the highest among GCC stock markets, ahead of Saudi Arabia on 12%. The figure rose from 27.7% in 2013. More than half of foreign investment – 16.6% of total investment – came from other GCC countries.

There are two types of equities listed on the MSM. The first are sociétés anonymes Omanaises generales (SAOG), also known as general joint-stock companies, which are freely traded on the exchange. The second type are sociétés anonymes Omanaises closes (SAOC), or closed joint-stock companies. The closed companies are listed on the exchange but are not traded on it. SAOG firms accounted for 64% of market cap, or OR9.31bn ($24.1bn) in 2014, while SAOCs accounted for 28% (OR4.04bn, $10.5bn).

Performance

The benchmark MSM30 Index of the 30 most liquid firms listed on the exchange fell by 7.2% in 2014, to 6343.22 points, following growth of 18.6% the previous year. The index had a weaker final quarter of the year, having peaked at 7548 on September 10, 2015. Industrial shares fell by 19.6% over the course of the year, financial shares by 5.4% and the services sector index by 5.3%. As of mid-September 2015 the index stood at 5800, representing a yearto-date fall of 8.6%. Industrial shares saw the heaviest losses in the first eight months of the year, with the industrial index down 9.1% for the year to the end of August, according to the MSM, followed by financial equities on 8.3%. Services were the best-performing major category, down 6.3% for the year.

The market’s weak performance over the past 18 months has been widely attributed to the decline in the price of oil, leading to concerns about an economic slowdown in the sultanate. However, partly as a result of such falls, investments in the MSM currently offer attractive valuation ratios. OR450m ($1.2bn) was distributed as dividends to investors in 2014, providing a yield of 5.4%, the highest in the GCC and also among the highest in the world, according to CMA data. Furthermore, the market’s price-to-earnings ratio stood at 10.5, the lowest in the region.

Despite this, industry figures OBG spoke to did not expect a major uptick in the near term. “The market will remain subdued in the coming months,” said Pradeep Asrani, managing director of Gulf Baader Capital Markets. “Oman and the wider GCC region are dependent on oil revenues for balancing their budgets and crude oil prices have fallen substantially.” However, he said that some companies and industries might outperform the market as whole. “Banks still offer good dividend yield, and share prices of utility companies in both telecoms and power will remain stable, as in telecoms average revenues per user are relatively stable irrespective of the economic environment, and power utilities have guaranteed off-take.”

Lo’ai Badie Bataineh, head of investment management and chief investment officer of Oman Arab Bank, told OBG that industry and manufacturing, by contrast, face pressure as a result of factors such as the government’s decision to cut gas subsidies and the recent appreciation of the rial (due to its peg to the rising dollar), making locally produced goods more expensive and putting pressure on exports.

Trading Volume

The MSM is comparatively illiquid, with only a small number of stocks trading in large volumes. The total value of transactions on the exchange in 2014 stood at OR2.27bn ($5.88bn), representing an average daily trading volume of OR9.3m ($24m). The figure was almost unchanged from 2013, when annual trading volume was OR2.26bn ($5.85bn), though well above the levels seen in previous years.

Trading activity fell by 85% to OR707.3m ($1.8bn) in the first half of 2015, pointing to a substantial tightening in market liquidity. However, upcoming IPOs should help to increase transaction levels. “Insurance listings will help with market liquidity – in addition to the advantages for the insurance sector,” Jalila Hamed Al Akhzami, strategy and business development researcher at the CMA, told OBG, referring to new regulations obliging local insurance firms to conduct IPOs by 2017 (see analysis).

By far the most traded stocks on the exchange by industry were financial equities, accounting for 54% of trades, followed by services equities on 32% and industrial shares on 12%. The two largest companies by market capitalisation, Omantel and Bank Muscat, were also the most heavily traded companies by value, respectively accounting for 13% and 11% of total trading value for the year.

Brokerages

There were 21 brokerages active in the market in 2014. The largest in the sultanate by transaction volume in 2014 was United Securities, with a market share of 13.4%, according to MSM data. However, the second-placed brokerage, Gulf Baader Capital Markets, in December 2014 acquired the brokerage business of Bank Muscat, which placed fifth in the rankings for the year. Based on the two firms’ 2014 figures, the new entity has a market share of 20.1%, which would comfortably rank it in first place.

Asrani said that he expected further consolidation in the brokerage market along similar lines. “Some of the banks that continue to provide brokerage services may follow the lead of Bank Muscat, as their revenues from brokerage business are miniscule in comparison to their core banking businesses,” he told OBG.

Debt Market

As of September 2015, 21 bonds were listed on the MSM. These comprised 12 corporate bonds with a combined issue value of OR241.8bn ($626bn) and nine government bonds with a value of OR1.33bn ($3.4bn). All of the corporate issues are from financial sector firms, with the exception of two instruments listed by oil services company Renaissance Services. Coupon rates on government bonds vary between 2.75% and 5.5%, while rates on corporate bonds run from 3.5% to 5.5%, with the exception of a subordinated bond from Bank Muscat that is an effective outlier at a rate of 8%.

The MSM saw three bond listings with a combined issue value of OR233.64m ($604.9m) in 2014, namely a 4.5-year debt issue by Bank Muscat, a five-year issue by Al Omaniya Financial Services and a government listing. Such issues have helped the bond market to grow rapidly, from OR560m ($1.4bn) in 2011 to OR1.22bn ($3.2bn) in 2014, according to the CMA. By late September 2015 the market had expanded to an issue value of OR1.57bn ($4bn). Trading levels are also relatively low. The value of traded bonds in 2014 was OR33.8m ($87.5m), down from OR46.9m ($121.4m) in 2013 and equivalent to 1.5% of the value of share transactions, worth OR2.24bn ($5.8bn). However, transaction volumes have been growing rapidly. The number of bonds traded in 2013 was 213,698, up from amounts in the low five figures in previous years, and while it fell to 86,569 in 2014, this still represented a near four-fold increase on 2012.

Corporate Bonds

The corporate bond market is underdeveloped, with its combined issue value equivalent to 15% of the debt market’s total value. “Corporate bonds so far have not been a big success in Oman; few have been issued and they are rarely traded,” said Rashad Ali Abdullah Al Musafir, acting CEO of Bank Sohar. A number of factors underpin this. Projects in Oman are usually financed via banks rather than the bond market, as there is ample liquidity in the banking sector that can meet companies’ requirements at competitive rates. Sunil Kumar Pherwani, general manager of marketing and sales at Oman Orix Leasing Company, told OBG why Omani finance firms – which rely heavily on debt issues in many countries – have rarely turned to the bond market for funding. “Most have long-standing relations with banks and are able to borrow from them at attractive rates and for reasonable term lengths,” he said.

However, changing economic conditions could boost the pace of both sovereign and corporate debt issues. The government has announced plans to issue a sharia-compliant bond in the near future and may seek to issue more debt in general as low international oil prices drive down state revenues and push the authorities towards deficit financing. The 2015 budget predicts a fiscal deficit of 8% of GDP.

Stepped-up government debt issues could in turn boost the corporate bond market. Helmi Haruna Rashid, general manager of wholesale banking at Bank Nizwa, said that a primary reason for the underdeveloped nature of conventional corporate bonds was the absence of a benchmark rate due to the lack of a well-developed sovereign debt market, but that this is likely to change. “Increased government debt issues would help with the development of a local corporate bond market,” he told OBG.

Islamic Debt

To date there has been just one sukuk issued in the sultanate, an OR50m ($129.5m) sukuk launched by real estate developer Tilal Development Company in November 2013 to fund the expansion of an office complex in Muscat. The instrument, which uses the very popular ijara sukuk structure – whereby the instrument effectively functions as a leasing arrangement – has a five-year maturity period and a profit rate of 5%. Approximately 95% of subscriptions by value were from local investors. However, government plans announced in January 2014 to issue an OR200m ($517.8m) sukuk may help to kick-start the Islamic debt market’s development. In May 2015 the authorities provided more details on the planned issue, saying that the minimum subscription would be OR500,000 ($1.3m) and that it would take place via a private issue targeting Islamic financial institutions. The CMA at the time said that the instrument would be listed on the MSM. At time of press the bond had yet to be launched.

Al Musafir said that there would likely be heavy demand for the instrument once it is launched, in particular if there is a downturn in the economy. “In difficult times there is strong demand for sovereign assets,” he told OBG. However, demand will depend in part on the returns it offers. Gautam Datta, CEO of Al Madina Takaful Insurance, said that while the effective coupon on the sukuk had initially been expected to be low, in the end the yield proved to be quite attractive, at around 3.5%. “The fact that there is no prospect of the US Federal Reserve raising interest rates in the near future also boosted the attractiveness of the sukuk,” he told OBG.

While the sukuk is the main focus of government debt issues at the moment, it is likely to look at conventional debt offerings as well. The authorities may also look abroad for financing, with Bataineh telling OBG that he believed the government would consider issuing debt denominated in euros or dollars in 2016. Given a lack of fixed-income investment opportunities in the sultanate, interest in all of these instruments is likely to be high. “There will be a lot of demand from institutional investors such as pension funds for bonds of all types,” said Bataineh.

Corporate Sukuk Market

As noted, there has already been one corporate sukuk issued in the sultanate. Furthermore, major local corporates have shown interest in sharia-compliant debt financing. The largest Omani bank by assets, Bank Muscat, announced in October 2014 plans to launch an OR500m ($1.3bn) sukuk in the first quarter of 2015, though in March 2015 the central bank rejected its application to do so, citing concerns that the bank would use the money raised to step up personal loans, according to Reuters. The source cited said that the bank would restructure the application and file it again.

As with conventional sovereign and corporate bonds, the planned sukuk could help – indeed is necessary – to boost the development of corporate Islamic debt. “The sovereign sukuk will set a benchmark rate, which will create a new market for corporate sukuk,” said Sulaiman Al Harthy, group general manager of Meethaq Islamic Banking. “There is much corporate interest, but they have been awaiting the government sukuk issue to chart the way forward.”

However, some are less optimistic about the prospects for the development of the market, at least while other sources of financing are readily available, for reasons similar to those cited as having constrained the development of conventional bonds. “Funding from banks may remain cheaper than sukuk financing in the absence of an interest rate rise; however, corporates may find sukuks a more flexible option than bank funding. Activity in the Islamic debt segment will grow but it will take time for people to become familiar with it,” said Asrani.

Islamic Index 

The market authorities have also put in place measures to attract more Islamic-oriented investment into the equity market. In July 2013 the MSM launched an index of sharia-compliant firms, initially containing 32 companies. It lost 12% of its value in 2014, underperforming the benchmark MSM30. As of mid-September 2015 the index had lost another 6% since the beginning of the year.

January 2013 also saw the establishment of the sultanate’s first sharia-compliant investment fund, Vision Al Khair GCC Markets. Another Islamic fund, the Al Hilal MENA fund, was launched later the same year.

Financing Opportunities

Although the decline in the price of oil represents a challenge for the economy, it could prove a boon for the development of the country’s capital markets. As noted, increased government debt issues could spur development in the corporate bond market by establishing a benchmark interest rate. Furthermore, the CMA is keen to shed light on the ability of the sector to provide liquidity to projects irrespective of their size. “At a time when the price of oil is falling, the capital market will play a significant role in funding national projects. Recent IPOs demonstrate that there is a great deal of money in the economy available to provide such financing via the capital market,” Al Akhzami said, citing the heavy over-subscription of recent offerings (see analysis).

SME Exchange

In another move to develop the MSM, in July 2014 the CMA signed a contract with the Taiwan Stock Exchange to conduct a feasibility study regarding the creation of an equity exchange for small and medium-sized enterprises (SMEs). Al Akhzami told OBG that the project was scheduled to take around six months to complete once it is launched. The CMA is also seeking a company to help it develop a regulatory framework for the exchange. In addition to helping develop the capital market, the exchange would also be an important tool for developing the country’s SME segment, which is a government focus given smaller companies’ difficulties in attracting bank financing (see Banking and Economy chapters). However, Asrani was pessimistic about the prospects for the exchange. “Financing SMEs through the capital market is not realistic at the moment,” he told OBG. “There is a need for sizeable companies with a good track record, whereas Omani SMEs tend to be very small and are often start-ups,” he said. “Furthermore, the smaller companies that are currently listed are not very liquid, and investor interest in illiquid firms tends to be low.”

Regulation

The MSM is regulated by the CMA, which was established in 1998. The most recent major regulatory changes occurred in November 2014, when several amendments to the Capital Market Law were made via royal decree. These included new provisions on long-term Islamic financing instruments and new rules on takeovers and acquisitions, as well as toughened penalties for violations of market rules.

Corporate Governance

The CMA put in place a corporate governance code for listed companies shortly after its establishment in 1998. It has been revised several times, most recently in July 2015, when the authority approved amendments establishing new rules on auditing requirements, transparency and conflicts of interest. Industry figures said the new code would have a positive impact. “It is an improvement, which should help to attract discerning investors, but it will take time for its impact to be felt,” said Asrani. The CMA plans to eventually extend the code to other companies in addition to listed firms.

July 2015 also saw the establishment by royal decree of the Oman Governance and Sustainability Centre. The institution is in effect a new incarnation of the Oman Centre for Corporate Governance, which was created as a department of the CMA in 2010. The centre remains affiliated with the CMA but is now governed by a separate board of directors.

Investment Products

As of September 2015 there were 19 mutual funds listed on the MSM. The authorities are seeking to further develop the market by introducing new investment products. Derivatives and short-selling are currently prohibited.

Outlook

The MSM’s performance is likely to be subdued while oil prices remain at their current low levels. However, the fall in prices could facilitate the development of Oman’s capital markets, by prompting the government and government-owned firms to diversify their sources of financing. The government’s planned sukuk launch should help to further the development of the corporate Islamic debt market in particular. The extension of compulsory listings requirements to the insurance sector and efforts to relax IPO requirements (see analysis) are also set to boost market activity and liquidity, and the demand for equity and debt listings is likely to remain high.