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GCC Markets - Who created value in the medium/long-term?

Date : 18/11/2015
Author:  Marmore MENA


The main goal of an investor or a money manager is to create wealth - be it through capital appreciation strategy, dividend strategy or a capital preservation strategy. Unfortunately over the last 10 year period (2005-October 2015) all but Muscat stock exchange failed to create wealth for investors. That said, looking at the 5 year data, UAE and Qatar posted remarkable returns compared to its peers. Dubai and Abu Dhabi posted 16% and 11% five year CAGR respectively while Qatar posted 9% during the same period the main catalyst for Qatar and the UAE was the inclusion of their respective markets in MSCI EM Index. Assuming investors picked a passive strategy , they would have failed to create wealth over the 10 year period (except Oman) and the 5 year period (barring UAE and Qatar)

While at a macro level markets did not create value, at a stock level we have many winners and losers. After dissecting the stock universe based on size (large, mid and small), we applied liquidity filter (to weed out illiquid companies) to see how they stack up. Here are the results of GCC value creators.

Large Cap GCC companies

We identified 30 large cap companies for our 10 year analysis and 40 companies for our 5 year analysis dominated mostly by banks followed by Telecom. Over the past 10 years, large caps yielded a CAGR of -4% (the range was between +14% and -10%). The range was more pronounced in the 5 year period, during which GCC large caps posted returns ranging between +34% to -23%. However on an average, GCC large cap companies posted +7% (5 year CAGR).


Banks dominated over the 5 and 10 year period
Source: Reuters and Marmore, the chart shows the dominance of each sector, measured by the total number of companies in our study

Mid Cap GCC companies

Most money managers will focus on large and medium cap companies within their asset allocation strategy since small cap companies are considered risky. Had they invested in mid cap companies, would money managers have outperformed top heavy allocations? In short, yes, since mid cap companies performed better than large caps on both 10 and 5 year periods. Over the 10 year period the CAGR was -2% (50% less than large caps) while 5 year average CAGR was slightly better than large caps at 8% In this study we identified 144 companies that fit our criteria for the 5 year period and 98 companies that fit our 10 year period criteria.

Banks dominated the scene in the 5 year term however in the long run (10 years) retail had the largest share of companies that fit our criteria

Small Cap Companies

In our study of small cap companies, 418 companies matched our 5 year criteria and 287 companies matched our 10 year criteria. On average small caps destroyed wealth, be it during the medium term investment period of 5 years or a long term period of 10 years. GCC small cap destroyed wealth on average by -1% CAGR during the 5 year period and -6% during the 10 year period.

The ranges of returns were the highest among the 3 classifications (large, mid and small cap). In the 5 year CAGR timeline, GCC small caps posted a high of 41% and a low of -39%. When pulling the data further to 10 years, the range of return was quite similar +44% to -36%. 


No significant leader in the 5 and 10 year sphere as plethora of companies are represented in the small cap sphere


Source: Reuters, Marmore the chart shows the dominance of each sector, measured by the total number of companies in our study

Final Words

All in all, GCC market performance over the past decade was negative. Over the past 5 years, only large and medium cap companies created value (based on our liquidity criteria). Moreover, banks clearly dominated the pool of sectors. That said investors should evaluate their investment strategy annually and make appropriate changes to avoid capital loss. Our experiment shows that simply being a long term dormant investor does not work as everything changes with time and so should our investment strategy and outlook. Passive investors who invested in 2005 have no edge over people who invested in 2010 or few years ago.

Published by: Marmore MENA

Tags:  Capital Markets, GCC Markets

 Current rating: 0 (3 ratings)

Fiscal Measures Worry Markets

Date : 10/11/2015
Author:  Marmore MENA

According to Marmore’s recently released Monthly Market Review, MENA markets ended mostly in red during the month of October 2015. Abu Dhabi (-4.0%) suffered the most, followed by Saudi Arabia (-3.8%), Dubai (-2.5%) and Bahrain (-2.0%). Despite the increase in oil prices during October, the lower-than-expected oil prices continue to strain the MENA markets. The regional markets are also responding to instability in the global economy and anticipated monetary tightening in response to low oil prices.  KSA is contemplating spending cuts and tax increases to manage its fiscal deficit. Saudi Arabia's weakness is dampening sentiments of the region, even in countries such as the United Arab Emirates & Kuwait, which are relatively well placed to cope with an era of cheap oil. Egypt (3.1%), Oman (2.4%) and Qatar (1.2%) markets gained in October. Kuwait’s price index ended the month of October with a marginal gain of 0.9%. On the contrary the Kuwait weighted index remained stagnant. 

Global equities ended the October month with strong gains after a sharp fall in August and September, which was fueled by fears over the global slowdown, with China as the epicenter. Oil prices rose after the U.S. oil rig count fell for a ninth straight week, indicating potentially lower crude output in coming months in the face of a global supply glut. Subdued worries about slowing Chinese growth, proactive approach of rate cuts by People’s Bank of China to stimulate the economy and investor’s positive response to U.S. Federal Reserve continued lower interest rates low and the European Central Bank further easing are some of the key reasons that fueled the rally of the Global equity markets in October.
MENA markets liquidity gained some momentum in October, with volume increasing by 12% and value traded by 14.2%, post the lulled market activity due to Eid and investor sentiments. However, Abu Dhabi, Dubai and Bahrain are a few exceptions where the trading activity declined. Amongst the MENA markets, Morocco showed the most improvement with value traded increasing by 33.3% and volume traded increasing by 58%. With the value traded declining by 79% and volume by 68%, Bahrain’s market liquidity was worst hit. 
Emirates Telecom (UAE) has benefited from its decision to allow foreign and institutional investors to own its shares from Mid-September and has rallied since then. Despite the drop of 9% in Q3 profits, it managed to be the top gainer (7%) in October, followed by SABIC (KSA) and NCB (KSA) which gained 4.8% and 4.5% respectively. First Gulf Bank (-11.5%), National Bank of Abu Dhabi (-8.6%) and Al Rajhi Bank (-5.9%) were the top three losers in October. With the top three losers being banks, it is evident that banks in the region are grappling with margin pressures and liquidity issues as the oil producing states face a squeeze on budgets from lower oil prices.
Saudi Arabian Government is actively pursuing several initiatives to keep its fiscal budget deficit in check. Saudi Arabia is considering raising domestic energy prices; the existing system of subsidies in the kingdom is blamed for waste and surging fuel consumption. Saudi Arabia's government was in talks with local banks to sell them 20 billion riyals (USD 5.3 billion) of local currency bonds.

Figure 1: Brent Crude and WTI, 2014-Present, USD per barrel

Iran will officially notify producer group Organization of Petroleum Exporting Countries (OPEC) in December of its plans to raise its crude oil output by 500,000 barrels per day (bpd). Kuwait said there were no calls within OPEC to change the oil group's production policy and that lower output from high-cost producers could support prices in 2016, adding to signs OPEC will keep its strategy of defending market share. Meanwhile, OPEC forecast in a monthly report that demand for its oil in 2016 would be much higher than previously thought as lower prices curb U.S. shale oil and other rival supply sources, reducing a global surplus. U.S. oil drillers removed 16 rigs in the week ended Oct. 30, bringing the total rig count down to 578, the least since June 2010.

Tags:  Capital Markets, Economy, GCC Markets, MENA

 Current rating: 0 (3 ratings)

Fall Together, Rise Alone!

Date : 18/01/2015
Author:  M.R Raghu & Humoud S 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 February 2006 while the SENSEX peaked to 20,873 points on August 2008. 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 200% 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 an annualized return of 23% against an annualized return of 13.5% for Saudi Arabia.

Obviously this bounce back for India has produced some valuation excesses compared to Saudi Arabia. India currently trades at a p/e level of 17 (median is 17.4) while Saudi Arabia trades at 14 (median 14). Due to low valuation, Saudi offers better dividend yield (4.1%) compared to India’s 1.3%. 

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.

2 years ago we suggested the above scenarios - fast forwarding today, the Indian market remains on its bull trajectory and the differential gap widened while Saudi remained tottering sideways on the back of a collapsing oil market and an endearing geopolitical risk from neighbouring countries.


Tags:  GCC Markets

 Current rating: 0 (3 ratings)

Why is Liquidity important? Some Research Snippets

Date : 20/04/2014
Author:  M.R Raghu

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

  1. 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
  1. 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.

Tags:  GCC Markets, Oil, Stock Market

 Current rating: 3 (3 ratings)

GCC Financial Markets: The World's New Money Centers

Date : 02/06/2013
Author:  M.R Raghus

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:

Tags:  GCC Markets, GDP, Stock Market

 Current rating: 4.5 (3 ratings)
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