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Brent’s record rise sustains MENA momentum

Date : 08/05/2016
Author:  Marmore MENA

According to Marmore's recently released Monthly Market Review, April was a positive month for all MENA indices, barring Bahrain, Qatar and Jordon, as oil rise buoyed markets. Saudi Arabia (9.4%) was the star performer, followed by Oman (8.7%) and Morocco (6.9%), while Kuwait price and weighted indices rose 3.1% and 1.8%, respectively, in April.  Jordan was the worst performer in the month of April, registering a fall of 3.4%. Brent crude rose to its highest monthly gain in seven years, climbing 21.5% to close the month at USD 48.13 per barrel. S&P GCC also improved by 5.7% in March, to close at 95 points.

Gulf markets have been gaining for the past couple of months, on the back of strong oil market performance, with the belief that the oil price movements have turned a corner. Investor focus has now shifted to the corporate earnings that are affected by the austerity measures, which were undertaken due to low oil prices. The TASI index performance was largely due to companies beating their first-quarter earnings estimates, as well as the surge in oil prices. The combined net profits of Qatar's publicly traded firms stood at QR10.8bn for the first quarter of 2016, down 18.9% over 1Q15. Real Estate and Industries sectors led the rout falling by 62.5% and 18.6%, respectively.

MENA markets liquidity had a negative month, with volumes decreasing by 11% and value traded falling by 5.1%. Oman and Kuwait witnessed increases in both volume and value traded, whereas the rest of the markets recorded declines in both. Volume and value traded in Oman increased by 61% and 42%, as investors responded to positive earnings season and rise in oil prices.

Most Blue Chips ended the month of April in green, with Al Rajhi Bank (Saudi Arabia) topping the charts at 16.4%, as the company witnessed a 33% increase in quarterly earnings, mainly due to higher fee income. SABIC (KSA, 13.7%) and Emaar Properties (UAE, 13%) followed, as the former benefitted from rise in oil price, while the latter reported a 17% rise in earnings, despite weakening market conditions. Leading UAE banks witnessed large earnings decline in the first quarter, and most, with the exception of a few, reported rising pressures on key performance indicators such as loans and deposit growth, and asset quality in their first quarter results. Abu Dhabi Commercial Bank (earnings, -18%), National Bank of Abu Dhabi (-11%), Commercial Bank of Dubai (-18%) were some of the big names on the list. ADCB and CBD witnessed a fall in operating income, because of drop in business volumes, while NBAD’s incomes reflected lower investment gains and higher provisions.

Global Oil News
OPEC and non-OPEC producers failed to reach a deal to freeze oil output at the Doha meeting in April, as OPEC members requested for more time to reach a deal among themselves, possibly at a June meeting, before striking one with other country producers.

Kuwaiti oil and gas workers have ended a three-day strike that had temporarily cut the OPEC member's crude production by nearly half. The strike forced Kuwait Oil Company (KOC) to cut output to as little as 1.1 million barrels per day (bpd), down from a normal level of about 3 million bpd, as workers fear reduced salaries, benefits and staff layoffs will be part of a planned government overhaul of the payroll system in the public sector.

According to Reuters, OPEC's oil output rose in April to close to the highest level in recent history, as production increases led by Iran and Iraq more than offset the strike in Kuwait and other disruptions. The region’s top exporter, Saudi Arabia, made no major change to its output, despite the kingdom hinting it could boost supply after OPEC and non-member nations failed to reach an agreement earlier in the month.

Despite the recent rally, oil markets remain oversupplied by about 1-2 million barrels of crude per day, which has led to global storage tanks filled to their rims with unsold fuel.

Oil Market Review
Brent crude hit a high of USD 48 per barrel in the month of April, up 21.5% from March, the best monthly gain seen since May 2009. Weaker dollar and positive sentiment about the global supply glut easing raised crude oil futures by more than USD 20 per barrel, since witnessing 12 year lows of below USD 30 per barrel, in the first quarter. Oil price rose, despite OPEC and non-OPEC producers failing to reach a deal to freeze oil output. Members informed non-OPEC producers that they need to first reach a deal within OPEC, possibly at the upcoming June meeting, before being able to invite other producers to join the accord.

Tags:  Capital Markets, MENA, Oil, Stock Market

 Current rating: 5 (3 ratings)

All-Time Highs - Kuwait 15 Index Stocks

Date : 24/01/2016
Author:  Marmore MENA

2015 is over and before we start the hustle and bustle of the New Year we would like to take a moment and reflect on the past year. The Kuwait 15 index posted a negative 15% return due to many factors including the decline in oil prices (Brent lost 35% in 2015), low liquidity and lackluster earnings growth.

Instead of analyzing the index we are going to analyze performance on a stock level and measure the divergence from the recorded all-time highs (ATH) of the respective stocks since fundamentally sound stocks (good top and bottom line growth, sound management etc.) consistently establish new ATH’s reflecting growth and opportunities. While stagnant companies may struggle to re-conquer their ATH’s and can thus test investor patience (Japan for e.g.).

Looking at Kuwait 15 Index constituents, the only positive news comes from the newly added stocks Mezzan (listed in 2015) and VIVA (listed in 2014). For VIVA the difference between the all-time high and 2015 closing price was -10% and the last ATH occurred 18 days before the year ended in 2015 while Mezzan holding lost only 2% from its ATH which occurred 9 days before the year ended. Although the two stocks feature in our note on account of being a part of the Kuwait 15 Index, we will exclude them from analysis due to its recent listings.

Looking at the list above only one company (Kuwait Food) achieved its ATH in the last 2 years and only 2 companies posted their all-time  3 years back (Mabanee and Boubyan bank). Looking at Mabanee we can see that the stock is hovering 8% below its all-time high, while Boubyan Bank is trading 24% below its all-time high. Apart from the 3 companies mentioned above, 8 companies in the Kuwait 15 index posted their all-time highs between 7 and 9 years ago and they are trading in a range of -86% to -44% of their all-time high prices.

Looking at the table above we could clearly see the impact of market mania during the bull market of 2004-2008, 10 out of 15 companies in the index reached their all-time high during this period. During market bubbles investors usually believe that stocks can only go up, thus we see stocks reaching all-time highs without being backed by strong fundamentals. That said the companies on the list are among the largest in the Kuwait stock exchange and are operational in nature compared to small capitalized companies and an uptick in the economic environment will most likely enhance growth.

The top loser in terms of number of years in our study is Agility; the company posted its all-time high in 2005, almost 11 years ago, and is currently trading 82% below its all-time high and needs to gain 448% just to catch up with its ATH. The top loser in terms of gap between the ATH and current prices is Zain. At the end of 2015, Zain traded 86% below its all-time high of KWD2.538 which means that for it to close the gap, the price of Zain’s stock must increase by 625%!

It is important for bellwether stocks to touch new highs and not languish on old glory. Stocks touch new highs primarily on performance though speculation cannot be ruled out. While speculation can set the fire, the continuance depends on fundamental performance. Being part of Kuwait 15, these stocks enjoy high liquidity and patronage from institutional investors as well. They are well covered by analysts (relative to the whole market). While constructing a portfolio/investment strategy, it is important to note whether stocks are touching new highs. It is better to avoid stocks that came away a long mile from their historic highs and shows no signs of getting there. While these stocks will still be part of index funds or ETF’s, they need not be part of an active portfolio strategy.

Tags:  Capital Markets, Kuwait, Stock Market

 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)

Never Scream Sell in GCC!

Date : 13/08/2012
Author:  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

Tags:  GCC Markets, KSE, Stock Market

 Current rating: 0 (3 ratings)
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