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Why is Liquidity important? Some Research Snippets
M.R. Raghu & Humoud Al Sabah

Liquidity is at the backbone of any market development and GCC stock markets are no exception. Strong oil price backed wealth effect coupled with retail nature of the market triggering speculative activity contributed to very robust liquidity levels in the past, especially before the financial crisis. Liquidity is generally measured as total value traded and is expressed as a % of total market capitalization to arrive at the velocity. A high velocity may indicate that liquidity is running ahead of the market and vice versa. Also, improved liquidity has many benefits including cost of transaction. In the context of GCC stock markets, the following questions beg answers:

1. By how much did the liquidity drop for key index movers measured in terms of before and after Global Financial Crisis?

2. What impact such a drop had on the bid-ask spread (a proxy to measure transaction cost)

3. Are there any inconsistencies in this and if so what can explain it?

Before we answer these questions, let us quickly explain the methodology of this small research:

1. We collected daily volume, value traded, market capitalization, bid-ask spread on 15 heavy weights in the GCC stock markets

2. We organized this data in terms of pre financial crisis (before 2008) and post financial crisis (after 2008).

3. We calculated Average Daily Value Traded (ADVT), a measure of liquidity for all the stocks

4. We also calculated the Turnover ratio (defined as total volume traded/number of outstanding shares).

Now let us turn to our findings in a quest to answer our questions:
Table 1- % change between Pre-crisis (2003-2008) and Post crisis (2009-2013) 


1. By how much did the liquidity drop for key index movers measured in terms of before and after Global Financial Crisis?

Regarding the first question liquidity dropped across the board in the aftermath of the crisis as expected. For example SABIC’s daily average value traded (ADVT) stood at  USD 178 mn dollars during the period from 2003-2008. Post 2008 the ADVT fell by 27% to USD 130 mn dollars. Saudi Telecom saw a large decline in ADVT from USD 100 mn before the crisis to USD 11.9 mn a drop of almost 90%. The table above shows the effects of the crisis on the average value traded.

Table 2- Summary of finding

2. What impact such a drop had on the bid-ask spread (a proxy to measure transaction cost)
In general, as liquidity improves, bid-ask spread reduces thereby reducing the cost of transaction. In the case of heavy weight GCC stocks, spreads increased in response to a fall in the liquidity for most of them. SABIC’s  Spread was 0.23% prior to the financial crisis while after the crisis it increased to 0.3%. In the case of Saudi Telecom the Spread increased marginally from 0.27% to 0.29%. The biggest increase in spreads is seen in Zain where before the crisis the spread was around 0.75% (high compared to Saudi companies) while after the crisis it increased by  88% to 1.42% though this cannot be totally attributed to a fall in ADVT as ADVT declined only by 9% compared to pre-crisis numbers

3. Are there any inconsistencies in this and if so what can explain it?
Finally were there any inconsistencies? Some companies in our study showed positive correlation in that while liquidity decreased, the bid-ask spread also decreased and vice versa. Examples include Emaar, First Gulf Bank and industries Qatar. However the main reason behind this positive correlation is that the mentioned companies did not have sufficient history for us to make meaningful comparison between pre-crisis and post crisis numbers. The only company with sufficient data was SAMBA and we could attribute the fall in liquidity to the financial crisis and attribute the fall in spread to peers. In other words, before the crisis SAMBA had the highest spread among Saudi banks under our coverage thus the number after the crisis had to drop to be in line with other Saudi banks.

Concluding Thoughts:
Leading GCC stocks today have more bid-ask spread than a few years before thanks to poor liquidity. The bid-ask spread ranges from a low of 0.18% (Industries Qatar) to 1.52% (National Bank of Kuwait). Going forward, as liquidity improves, the bid-ask spread should reduce and may reach levels seen before the financial crisis. Market attractiveness to institutional investors can be significantly increased if liquidity improves and reduces the bid-ask spread.

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GCC Markets, Stock Market, Oil
The Mega Rupee Slide
M.R. Raghu

The Indian Rupee (INR) is one of the worst performing currencies in the world during 2013 (Table-1). At Rs.65.5/USD it slid by a whopping 19.8% in 2013 (so far) after sliding down by 4% during 2012. The month of August was especially devastating. Since 2000, the current rupee level is the highest ever seen (look at the graph). From a low of Rs.39/dollar in Feb 2008, the Rupee is close to Rs.65.5/dollar. Repeated efforts by RBI to stem the rot went in vain so far. The trigger for such a dramatic fall has been attributed to US decision to roll back the Quantitative Easing (QE) as US economy has started showing signs of a pickup.

Mega Rupee Slide Graph

The following questions emerge out of this:
1. Why did the rupee depreciate so fast?
2. How does it affect various people?
3. What is the further downside and where can it settle?
4. What is the long-term prospect of Rupee? &
5. What should be the strategy?

Let me try and answer them one by one:

1. Why did the Rupee depreciate so fast?
Technically rupee depreciates against the dollar when people sell rupee and buy dollars. And when people sell rupees and buy dollars, it results in negative capital flows and leads to downward pressure on the currency (and vice-versa). The following reasons can be explored:
    a. US Monetary Policy
    b. Slowing Indian Economy
    c. Ineffective RBI 
    d. Corporate Debt and Hedge &
    e. Weak domestic equity market

US Monetary Policy
The US Fed initiated a series of monetary easing programs more commonly known as Quantitative Easing (QE) which created copious amounts of liquidity in the global market. The simple idea behind QE is to purchase government bonds in order to keep the yields low, as low interest rate will then help economy recover. Now that the US economy is showing signs of recovery, the Fed has announced its intention to taper the QE i.e, stop buying the bonds. In response to this news, the bond yields started moving up and capital has started moving back to US in search of safety. In other words, capital left markets like India, Brazil, etc and is going back to US.

Result: Investors flee other currencies and take shelter in US Treasuries (the so called safe haven) causing USD to strengthen and other currencies to weaken

Slowing Indian Economy
The Indian economy, which was once heralded as the next big thing by economists around the world, has lost its sheen and grew by a decade low of around 5% in 2012-2013.

Indian economy’s deficit is spiraling out of control. Both the fiscal deficit (expenditure more than income) and current account deficit (imports more than exports at a simple level) are headed for further deterioration during 2013 and next. While the fiscal deficit is at 4.9% of GDP, the current account deficit is at 4.8% in the year 2012-13. The current account deficit is triggered primarily by trade deficit (Export-Import). Not only our imports exceed exports, but even within the imports the dominance is by oil and gold imports, something very difficult to control. Lack of progress in deficit reduction is causing poor foreign investor confidence which contributes to negative capital flows (meaning foreigners taking their money out of the country). The deficit is a long-term problem especially the fiscal deficit. No matter which government is in place, populist policies will continue as a tool to gain votes and this will ensure that the deficit does not come down. However, if they do not go up, then that itself will be good news.

Also, during the past few years, Indian government has attained notoriety for governance lapses (2G scam, etc) and policy missteps. Revising the IT Act retrospectively from 1962 in order to bring Vodafone to book was a huge blow to the confidence in our legal structure to foreign investors. Also, there were several governance failures that keeps India in the wrong side of the news globally (a good indication is the number of negative articles that appear in The Economist).

Result: Foreign investors exit by selling rupees and buying dollars

Ineffective RBI
Reserve Bank of India is tasked with ensuring the financial stability of the economy and hence is the sole inventor of the monetary policy. In the past, when currency encountered volatility or undue fluctuations, RBI used its foreign exchange reserves to intervene in the market (through purchase or sale of dollars) and thereby reduce the volatility of the currency. However, this time around, they raised their hand and declared openly their intention not to interfere in preventing the rupee slide. This may be due to limited foreign exchange reserves currently at $277 billion enough to cover only 7 months of imports. For China, it amounted to $3,500 billion and represented 21 months of import cover, a far comfortable situation to be in.

Instead, during the July and early August meetings, the RBI intervened by tightening the monetary policy. It increased the short term rates by hiking the marginal standing facility by 200 basis points. This further exacerbated the situation with the current economic conditions. During its latest meeting, it signaled a reversal of this tightening policy. Hence, we can clearly understand the predicament of RBI to intervene. While RBI has not interfered directly, it has taken several steps to contain the situation:
    • It now requires exporters to repatriate 50% of export earnings placed in special accounts 
    • Restrictions on investments done abroad by Indian companies and citizens.
    • Limits on intraday net open positions of foreign exchange dealers
    • Restricting currency derivatives (to check speculation)
    • Hiking the interest rate on NRI foreign currency deposits as well as rupee deposits

The major news that has hit the street and has buoyed sentiments of investors, corporates and economists alike is the appointment of Raghuram Rajan as the new Governor of RBI. The former chief economist of IMF is known for his famous prediction of the 2008 global financial crisis and is widely tipped to steer the Indian economy back to growth. In his first address as the RBI Governor, he hinted at the RBI taking actions to save the rupee (although his primary focus is on inclusive growth and development, as well as financial stability).

Following were the key measures that he alluded to for rupee stabilization on the first day of his office:
    • More settlement of import trades in rupee which will help in lesser usage of dollars.
    • Special swap window for Foreign Currency Non Resident Deposit B (FCNR B) to reduce cost of funds of banks by at least 250 basis points.
    • Raising of Banks’s unimpaired Tier I capital to 100% from the current 50%.

Result: RBI has no arsenal to arrest the slide immediately but is using other indirect means. Hope for appreciation of the rupee from the reforms taken by the new Governor.

Corporate Hedge & Debt
Many Finance Managers, while managing their foreign exchange exposure, turned quite easy and relaxed due to continued rupee strength during the last few years especially during 2010 when rupee was averaging say 45 (you don’t need to hedge when rupee is strengthening if you are an importer and vice-versa). They expected this to continue forever and hence did not bother to hedge their currency risk exposures. Also, many of them resorted to foreign currency borrowing mostly in short-term maturities from European banks disregarding the rupee depreciation danger. However, when rupee started falling (much against their expectations) they were caught off guard and ran for cover to hedge their exposure which led to intense buying of dollars leading to its appreciation. Now many short-term corporate debt is coming up for repayment which will also witness more dollar buying adding to the rupee pressure. Also, the ability to rollover the debt will be limited by European banks due to the European crisis.

Result: Companies will have to find dollars to repay their debt and incur loss due to unhedged positions

Weak Domestic Capital Market
The Indian equity market has not been able to attract investments from Foreign Institutional Investors (FIIs) due to the weak economy and the poor performance by Indian corporates. Although the equity market has seen FII inflow of around $12 billion till August 2013, it has witnessed net FII outflow of $3.1 billion from June till August 2013 which has exacerbated the fall in the rupee. If you look at Table 2 the outflow seem to be more on debt than on equity. If this trend continues, it will result in the further depreciation of the rupee.
Result: FIIs will continue to shun Indian equity unless the economic conditions become more favorable.

2. How does it affect various people?
A rupee weakness affects the following:
    • Importers (as they have to pay more rupees for the same dollar)
    • Economic image of the country (not able to arrest the fall)
    • Existing foreign investors (their investments are worth less now) &
    • Residents (in the form of say high oil price)

On the other hand, it benefits the following:
    • Exporters (as they get more rupees for the same dollar)
    • Non-resident Indians (NRI’s) (as they get more rupees for the same dollar)

3. What is the further downside and where will it settle?
While domestic weakness in terms of low growth, high deficit, high inflation has contributed to the falling rupee, we should also blame the global financial crisis accentuating the problem for us especially Europe. This has caused many currencies in the world to fall (see Table 1, Brazil) apart from India. RBI is playing a sensible role of not exhausting our foreign exchange reserves and is allowing the market to determine the level of rupee. If required, it could call on SBI to raise external financing from NRI’s like how it did in 1998 and 2000 (remember the Millennium bonds!). However, the days of Rs.50-55 are gone. Political weakness is expected to continue with weak policy responses on all issues especially with the elections around the corner. There is no quick solution to deficit problems and inflation. In terms of where they will settle, Rupee is a moving target and hence it cannot settle anywhere. In terms of calls, investment banks place at from a pessimistic Rs. 70 to an optimistic Rs. 60 in the next 6-12 months.

Rupee Predictions by various Financial Institutions
Deutsche Bank – Rs. 70 (one month)
CRISIL – Rs. 60 (by Mar 2014)
Barclays – Rs. 61 (next 6-7 months)
UBS – Rs. 70
Credit Suisse – Rs. 65

4. What is the long-term outlook for the Rupee?
The current Rupee bash has raised some structural questions about the long-term potential of the Indian Rupee. Any call on the Indian Rupee is a function of the long-term performance of the Indian economy and the impact of global crisis in as much as it has an impact on India. India, along with China, is among the fastest growing economies in the world even after taking the current dip in growth. Given the right leadership, and reforms, the economic potential of India is certainly good. India is among a very select few countries in the world which does not have any sovereign borrowings in foreign currency. All its debt are domestic though Indian companies have foreign debt. Hence, the current abyss can not only be stopped but can be reversed with some wise leadership and policy reforms. With respect to global crisis, it cannot be predicted as to when and where it can arise. There are several pressure points in the world and anything can erupt anytime to cause tremors in emerging markets like India. Only sound monetary and fiscal policy can save the day for India.

5. What should NRI’s dp?
The rupee currently trades at Rs.230/KD after touching a high of Rs.240 on August 28th. From the level of.190/KD seen during May 2013, this represents a fall of nearly 25% within a span of 4 months, something that has never happened before. Therefore, for non-resident Indians, this probably is the best time to remit money to India. If you have dollar investments, it will be wise to exit the position and remit the money back to India. If you have rupee denominated debt, this probably is the best time to partly or fully wind it down using remittance from abroad. However, borrowing in local markets to remit money to India may be a dangerous strategy as this involves taking calls on both currency and interest rates, the two most difficult things to predict in life!

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India Market, Monetary Policy, Reserve Bank of India - RBI, Indian Economy
GCC Financial Markets: The World's New Money Centers
M.R. Raghu

Spurred by high oil revenues, credit growth and economic diversification, real GDP growth rates in the GCC countries have been high in international comparison. They have been comparable to those of other emerging and developing markets and considerably higher than those of the world or the advanced economies on average. Together with growth in intra-GCC trade in the wake of the GCC customs union, this will lead to increased demand for financial services. This book explains these aspects and challenges of GCC financial markets. As financial markets often witness rapid change they are a moving target to study.

Mandagolathur Raghu of Kuwait Financial Center (Markaz) gives an outline of the various segments of the GCC financial sector and relates them to macroeconomic figures such as GDP growth, money supply, fiscal balance and inflation. He gives particular attention to asset management practices and the structure of the banking sector and identifies areas where further institutionalization and professionalization are needed.

For more info on the article, kindly click on the link below:

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GCC Markets, Stock Market
What is the “Fiscal Cliff”?
Rajesh Dheenathayalan

The term “fiscal cliff” refers to a series of fiscal events set to unfold in U.S. at the end of this year and in early 2013. These include:

·   Expiration of the Bush-era tax cuts at the end of 2012, including current lower tax rates on capital gains, dividends, income, and estates, as well as number of other measures.

·   Expiration of fiscal stimulus measures, such as a 2-percentage-point cut in Social Security payroll taxes and extended unemployment benefits.

·   Spending cuts of $ 1 trillion over 10 years – which Congress approved during the Republican-led standoff over raising the federal debt ceiling in 2011 – will start kicking at the beginning of 2013. .

Without a broad consensus among Republican and Democrat lawmakers to ensure the required Congressional action before the end of this December, up to $600 billion of expiring tax cuts, the levy of new taxes and automatic spending cuts to the tune of $ 200 billion are set to take effect at the beginning of 2013. That’s equal to about four percent of US GDP, which is likely to plunge US economy into a recession. The expected immediate collapse of financial markets due to these fiscal measures is coined as “Fiscal Cliff”.

It’s a double-edged sword. If the US government rolls back all expiring tax-cuts and implement spending cuts, it will be able to address both short and medium-term deficit problems - debt held by the public will fall to only 58 percent of GDP by 2022, below the 60 percent mark that many economists warn against exceeding. However, it will also result in a weakened economy that may fall into a recession, and unemployment will spike up to 9.1 percent from its current level of 7.9 percent. On the other hand, if all policies, including the payroll tax cuts, are extended, the economy will grow 2.4 percent but debt would also climb to 90 percent of GDP.

Therefore, the Congress and the White House need to work on a plan that uses a balanced approach. In the less likely scenario that Congress and the White House fail to reach any compromise whatsoever and are unable even to agree on how to delay the looming measures, there would be major consequences for global financial markets.

A recession in the US economy, coupled with the sagging European economies and a slowdown in China’s growth could really hurt the world markets.

According to a recent Bank of America Merrill Lynch fund manager survey, nearly three-quarters (72 percent) of global investors believe that the fiscal cliff is not substantially priced into global equities and macroeconomic data. The fiscal cliff is identified as the number one tail risk by 42 per cent of respondents – up from 35 per cent in September and 26 per cent in August.

Markets have been working on the assumption that the U.S. is going to address the fiscal cliff challenge with a more gradual adjustment. Should a falling off the cliff really happen, the global stock markets would go in for a major correction.

For further reading, please follow the below link:

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US financial markets, US government, US economy
Fall Together, Rise Alone!
M.R. Raghu & Humoud Al Sabah

This is a strange pair of two markets, Saudi Arabia and India. One is a rich oil producer sitting on huge amount of wealth and is 7 times richer than India on a per capita basis. Another is a growing emerging market three times the size of Saudi Arabia.

On the 31st of January 2005 the TASI index was at a modest 8,231 points while the SENSEX was at its modest 6,555 points. Since that date the TASI index peaked at 20,643 points on 28/02/2006 while the SENSEX peaked to 20,286 points on 31/12/2007. The global credit crisis in 2008 brought them down together (as they did to all the markets in the world) with their bottoms reaching during February 2009 shedding 79% and 56% respectively (from peak) of their values. However since that date SENSEX bounced back to post a return of over 100% while Saudi Arabia totters. This has created a chasm between the two markets in terms of long term returns. During the last 5 years, Sensex produced a negative annualized return of 2% against negative annualized return of 5% for Saudi Arabia. Strangely enough oil prices seem to correlate more to Sensex than to Saudi index TASI (may be spurious correlation!).

Obviously this bounce back for India has produced some valuation excesses compared to Saudi Arabia. India currently trades at a p/e level of 15 (median is 16.5) while Saudi Arabia trades at 12 (median 14). Due to low valuation, Saudi offers better dividend yield (4.1%) compared to India’s 1.4%.

For the future, the following scenarios emerge:

1.       The differential gap narrows with Saudi rising and India staying put or falling

2.       The differential gap widens with India keeping up the bull momentum and Saudi straying sideways as has been the trend of late

3.       The differential gap stays put with either both markets witnessing upward moment or both markets witnessing side way movement.

We would go with 1 above since valuation for Saudi Arabia borders on reasonable, government spending remaining strong, and oil price continuing to maintain strength. Time for pair trading among uncorrelated markets!




GDP Constant USD Bn



GDP Per Capita PPP (USD)



Market Cap (USD Bn) (22/Nov/2012)








Bombay Stock Exchange


TASI Al Share Index


Performance (CAGR)



5 years



3 years



YTD 11/12



Standard Deviation (2007-2012)





total number of Stocks Listed IN Exchange



No of stock in the Index



Top 5 companies in index and their weight

SABIC: 20%

ITC 10%


Al Rajhi Bank: 8%

Reliance 8.75%


Saudi Telecom: 6%

HDFC Bank 8.05%


Saudi Electricity 4.1%

HDFC 7.61%


SAMBA Financial Group 3%

ICIC Bank 7.52

Current Index Level (27/11/12)



Historical peak (2005-12)

20,643 (Feb.2006)

20,232 (Dec.2007)

Historical Trough (2005-2012)

4384 (Feb.2009)

8891 (Feb. 2009)

Peak to trough (2005-2012)



Trough to current (2005-2012)



 current P/E



Median P/E



Max P/E (2005-2012)



Min P/E (2005-2012)



Div Yield




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Saudi Market, India Market
Never Scream Sell in GCC!
M.R. Raghu & Humoud Al Sabah

We have been regularly monitoring analysts’ recommendations in GCC and notice a weird trend. Most of the calls are either buy or hold. Look at the table below:

Table 1- Recommendations Vs the S&P GCC

Since 2010, analysts scream either a buy or hold nearly 90% of the time. In the 2.5 years of study, only during 2H 2010 the market turned reasonably positive validating the scream. In all the other cases, the market movement was totally in contrast to the scream, especially during 2H 2011 when markets tanked 8.2% while 96% of recommendations were either buy or hold. This applies even at stock specific levels. We produce below some instances where analysts steadfastly screamed buy regardless of sharp drop in share price and side way movement for a long time.

Etisalat is a classic example where analysts were screaming buy from Dhs 16 all the way to Dhs 6.5! Thereafter the stock moved sideways since the last 2 years and even then analysts still screamed buy all the way. Another good example would be First Gulf Bank.

Analysts screamed buy when the stock was quoting at Dhs 13 and they continue to yell buy till the stock tanked to Dhs 4! After this episode, we notice a string of buy recommendations and some hold recommendations while the stock moved sideways for the last 2 years.

While we did not notice buy screams for Industries Qatar at the peak of the market in 2008, we noticed several hold and buy recommendations during the last few years when the stock performance was more or less flat.

So, the aggregate data presented in the tables above as well as stock level calls presented clearly point to one trend: analyst’s pre disposition to scream buy or hold rather than sell. We must say here that it is quite possible that we may have missed out on some recommendations especially those research notes that are proprietary and are not freely available for public viewing. In spite of this failing, we still believe that analysts are more prone to issue a buy/hold rating on a stock in GCC than sell.

It is interesting to understand the psychology behind this phenomenon which we espoused in our earlier blog and we feel they still stand the test. Here is our list of reasoning:

1. Buy recommendations can be acted upon even by new investors (suits the agenda of sell side brokers) while sell recommendations can only be acted by those who hold them (small universe)

2. Sell recommendations are almost always unpopular with companies and hence will not serve investment banking needs and other favours.

3. Sell recommendations are not acted upon as much as buy recommendations as it means accepting a mistake. (Behavioural finance!). It is difficult to take small loss than a poor but positive return.

4. Analysts are well served by companies they research when they give buy recommendation. They will have more access to information (extremely critical in GCC) next time around since they are in good books of the company.

5. In the GCC, absence of derivatives market makes it difficult to action sell recommendations except by portfolio managers. Even where derivatives market enables one to short, since the loss on short position tends to be unlimited, it has limited application (given the risk management pressure).

For these reasons, we believe GCC will be a “buyers” market for some time to come.

M.R. Raghu, CFA
Humoud Al-Sabah

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KSE, Stock Market, GCC Markets
Kuwait Top 15 Index
M.R. Raghu & Humoud Al Sabah

Executive Summary

Kuwait Top 15 Index was introduced to mirror the performance of the market as a whole while making it easier for fund managers to track the index by reducing costs and liquidity concerns. The Kuwait 15 differs from the Kuwait weighted Index and the Price index since it only takes into consideration the top 15 companies according to liquidity and size rather than taking the whole universe which contains hard to invest companies due to minuscule size and low liquidity.

Selection Process

International accessibility

Kuwait 15 Index (K15) simplifies investment procedures for fund managers and foreign investors demanding exposure on the Kuwaiti market since the market is top heavy, it makes little sense for index trackers (I.E ETFs) to be fully invested in KSE weighted index and/ or Kuwait Price index in order to mimic the movement of the Index. The K15 index will simplify the process of Index investment; reduce transaction costs and liquidity risks while maintaining low tracking error (since fund managers will only invest in 15 companies rather than 105)

Non-Oil GDP contribution

One of the main reasons for choosing the KW15 index was “ to be a bellwether indicator of the Kuwait Economy1” we checked this hypothesis by looking at the non-oil GDP contribution of the top 3 contributors2; Financial institutions, Transport storage and Communication and to some extent whole Sale and retail trade. Our findings shows that currently the Kuwait 15 index represents 57% of Non-oil GDP thus it could be used as a “rough” indicator on economic conditions

Non Oil GDP


The current structure of K15 gives the optimal exposure on KSE market movement however; missed opportunities from investing in this index might arise including:

1) The index is currently over-exposed to the banking sector; hence it could not accurately gauge performance in other sectors.
2) Although effective in gauging market sentiment, active medium-cap style managers will have larger tracking error since mid-caps are nowhere near the top 15 index.

Kuwait 15 Index factsheet

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M.R. Raghu & Humoud Al Sabah
Since Antwerp Stock exchange Equity markets were always [and still are] flooded more with buy recommendations than sell recommendations it becomes a curious topic to understand the rationale. This is even more true for GCC where more than 90% of the recommendations fall either in buy category or hold category with only few sell recommendations. Obviously with markets not doing that great, most of these buy recommendations should bite the dust. It is interesting to understand the psychology behind this phenomenon. Here is our list of reasoning:

1. Buy recommendations can be acted upon even by new investors (suits the agenda of sell side brokers) while sell recommendations can only be acted by those who hold them (small universe)

2. Sell recommendations are almost always unpopular with companies and hence will not serve investment banking needs and other favors.

3. Sell recommendations are not acted upon as much as buy recommendations as it means accepting a mistake. (Behavioral finance!). It is difficult to take small loss than a poor but positive return.

4. Analysts are well served by companies they research when they give buy recommendation. They will have more access to information (extremely critical in GCC) next time around since they are in good books of the company.

5. In the GCC, absence of derivatives market makes it difficult to action sell recommendations expect by portfolio managers. Even where derivatives market enables one to short, since the loss on short position tends to be unlimited, it has limited application (given the risk management pressure).

For these reasons, we believe GCC will be a “buyers” market for some time to come

Table 1- Recommendations Vs the S&P GCC

















































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It is difficult to forecast, especially the future!
M.R. Raghu & Humoud Al Sabah

How true…It requires tremendous courage to forecast especially when you have the strongest financial crisis hitting the world. Now is the time when investment banks would come out with their forecast for 2011. But, firstly how did they do in 2010. This is the purpose of this write-up and look closely at calls on US Economy, S&P 500, Emerging markets and commodities

US Economy

Table 1 GDP Data





BoA / Merrill Lynch






Credit Suisse


Deutsche Bank


Goldman Sachs


JP Morgan


Morgan Stanley










Source: Birinyi associates Inc and the institute of international Finance

The forecast for US growth ranged from a low of 2.1% by Goldman Sachs to a high of 4.9% by Deutsche Bank with the actual growth coming in at 2.7%. Most of them erred on the high side implying that the expectation was mostly bullish.

S&P 500

The actual outcome was very close to the consensus call at 1,222 with BOA/Merrill Lynch, Goldman Sachs and UBS getting it nearly right. However, earnings surprised the analysts as the final EPS turned out to be much higher at $84 as against the expected EPS of $76.


Table 2- S&P 500 Forecasts

 Investment House

         S&P 500         




BoA / Merrill Lynch









Credit Suisse



Deutsche Bank



Goldman Sachs



JP Morgan



Morgan Stanley














               $ 83.68

Source: Birinyi associates Inc. and Markaz research


Emerging Markets

It was a mixed bag for analysts. They got it completely wrong for China, Brazil, Malaysia and Peru while they got it right for India, Indonesia and to an extent Taiwan









Analyst recommendation
















Source: Birinyi associates Inc and  Thomson Data stream



Analysts mostly got it wrong on commodities and currency .They did not anticipate the huge rally in copper which closed the year at $9,650 much against the consensus estimate of $6,804. The call on gold was also mostly bearish with only BoA/ML calling at $1,500. oHowe However, the year ended with gold trading at $1,400, far higher than the consensus average of $1,213. The oil call was reasonably good with average forecast at $80 matching the year average of $79.

Analysts were forecasting a weaker dollar with expectations running as high as 1.59 in some cases. However, dollar held it strong and closed the year at 1.3.

Table3-Commodities and FX


Euro Vs USD



Crude Oil


($/metric ton)



BoA / Merrill Lynch















Credit Suisse





Deutsche Bank





Goldman Sachs





JP Morgan





Morgan Stanley











Average Forecast










Average price during the year







Source: Birinyi associates Inc , Thomson Data stream and Markaz research

On the whole, it was reasonably a good performance by analysts given the confused setting that prevailed at the beginning of 2010. Can we expect the same in 2011?


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Moving backwards in time…Removing KSA from MSCI GCC Index
M.R. Raghu & Humoud Al Sabah

A New era of protectionism or a vital market stabilizer clause?

The other day someone asked about the probability and time frame within which GCC countries (especially Saudi Arabia) are likely to be included in the MSCI EM index, the most widely followed emerging market index in the world. However, what happened recently is quite the contrary to this expectation. MSCI decided to discontinue Saudi Arabia in its MSCI GCC index effective September 2010. This sent fund managers in a tailspin as they now have to replace their benchmarks with S&P GCC index.

What really happened?

Here is the version gleaned from public space and private conversations. Tadawul (the official stock exchange for Saudi Arabia) required the right to prohibit (veto) MSCI from licensing the index to third parties involved in constructing financial products like ETF’s, future contracts, options and derivatives in order to prevent unexpected flow of money (both inwards and outwards). In other words, they do not want Saudi market to get swamped by “hot money”. Simply put, Tadawul wanted MSCI to check with them before MSCI can license its MSCI GCC index to any money manager. Also, Tadawul would have the right to refuse the licensing if it believes that the money may be “hot”.

However, MSCI feels that it is restrictive and anti-competitive and has never done this in its years of existence.  

The competitors (S&P and Dow Jones) were quick to jump in to fill the vacuum left by MSCI.

This may pass up as trivia given the fact that foreign investors (The term Foreign investors in this context does not include GCC nationals and residents of KSA) capture a small percentage of the total value traded (Figure -1). In August 2008 the Kingdom allowed foreigners to enter the Saudi stock market through Equity swap agreements with authorized persons. However, foreign investors are limited to the economic gains of the stock with no voting rights. Moreover the Saudi Capital market authority has the right to discontinue authorized persons from entering into a swap agreement and could impose limitations on each agreement or on beneficial investors.

Figure 1- percentage of foreign investors based on value trade

Source: the Capital Market Authority, KSA

It is not uncommon for stock markets to have very strict restrictions on foreign investment given the many episodes of how “hot money” killed some markets in the past. However, what Saudi Arabia needs today is more institutional presence and investment and not less. As such we have seen how liquidity dried up during this year. Also, Saudi market has been the traditional stronghold of speculative retail investors and this action will maintain that status quo.

Being part of MSCI EM index looks like a distant dream now…

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M.R Raghu is the head of research and President of CFA Kuwait. He is  also a certified Financial Risk Manager (FRM) from the Global Association for Risk Professionals, USA.

Humoud Salah N Al-Sabah
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Holds a B.A. Finance degree, from Gulf University for Science and technology & has completed the Graduate Training Program from Kuwait Investment Authority.
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