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Alghanim: “all crises revolve around economic issues. A genuine and transparent Public Private Partnership policy is the ultimate approach to overcome the consequences of political and social crises”
- The implementation of the new Capital Market Authority (CMA) rules is a step in the right direction, and we look forward to an effective dialogue among CMA and independent industry figures to support asset management and investment banking activities.
- A slowdown in non-energy sectors of the economy.
- Inflation in commodities overshadowed the sharp deflation in some dynamic economic sectors such as private sector lending, healthy operational assets in the investment segment, and low liquidity in KSE.
Markaz, reported its financial performance for the first quarter of fiscal 2011 at a net income unrealized loss of KD 759 thousands, or a 2 fils drop in earnings per share (EPS), compared to a net profit of KD 3.72 million, or 8 fils per share, for the same period in 2010, primarily due to volatility caused by the political tensions in the region, however Markaz risk management strategies paid off in limiting the loss .Markaz short-term debt totaled KD 12.54 million and total debt reached KD 42.11 million which represents 14.25% and 47.84% of total shareholders’ equity, respectively. Markaz assets under management reached KD 960 million.
Markaz Chairman and MD, Mr. Diraar Y. Alghanim, said "Although Markaz had a limited exposure to politically troubled markets, it was nevertheless negatively affected by the indirect impact of the political crises on regional and international markets, and therefore we witnessed high volatility in the first quarter. We truly believe that all crises revolve around economic issues, and that a genuine and transparent Public Private Partnership policy is the ultimate approach to overcome the consequences of political and social crises.”
Alghanim added “On the local level, the financial sector, regardless of the challenges it faces, remains fundamental to a healthy solid economy. It’s a main funding source for large-scale projects and institutions, through its ability to develop and manage various sophisticated financial instruments such as equities, bonds, sukuk, and mezzanine financing. For a strong beginning, we believe the Kuwait Development Plan will only come to fruition when a clear policy for financial sector involvement has been articulated, and is underscored by clear, unwavering support, especially after the noticeable sorting procedures by the State’s regulatory bodies. The implementation of the new Capital Market Authority (CMA) rules is a step in the right direction, and we look forward to an effective dialogue among CMA and independent industry figures to support asset management and investment banking activities.”
Mr. Manaf Alhajeri, Chief Executive Officer at Markaz said “We have recently witnessed a slowdown in the non-energy sectors of the economy, as inflation in commodities overshadowed the sharp deflation in some dynamic economic sectors such as private sector lending, healthy operational assets in the investment segment, and low liquidity in KSE. All of which highlights the dire need for an organised bond market in Kuwait. It is our firm belief that the creation of an organized local debt market would go a long way towards supplementing traditional bank financing, especially when it comes to long-term, riskier infrastructure projects, which have specific funding needs. This would allow for the execution of projects according to the highest industry standards, and will further Kuwait’s ultimate goal to become a major financial centre in the region.”
MENA Equity
MENA equity markets witnessed a highly volatile first quarter of the year, which though started on a positive note, slowly deteriorated due to geo-political tensions which initiated from Tunisia in North Africa and spread as far as Bahrain and Oman in GCC. Political tensions eventually subsided but enough damage was already done to the investor sentiment negatively affecting the equity markets in the region. The unrest however had two positive consequences for the region, one being the higher crude oil prices which moved above USD 110 per barrel, and another one being the additional spending and reform measures announced by the regional governments. It helped the regional markets to recover much of the losses, however S&P Pan Arab Composite Index still closed the quarter with a loss of -3.9%. Egypt was the worst performer losing 22.5% while Qatar and Saudi Arabia were the only two markets closing positive with a gain of 1.1% and 0.6% respectively for the quarter on the respective S&P country Indices. Apart from the geo-political tensions in the region, the cancellation of Zain-Etisalat deal also weighed heavily on the investor sentiment in Kuwait as severe selling pressure was seen on the leading blue chip shares in the Kuwait Stock Exchange taking the KIC Index down 10.7% for the quarter.
In a challenging and highly volatile environment for equities, Markaz funds continued to manage the risk inherited in equity markets efficiently to beat their benchmarks. Markaz flagship Kuwait focused funds ‘Mumtaz’ and ‘MIDAF’ closed with a loss of -9.8% and -8.8 % respectively for the quarter, while MENA focused ‘Markaz Arabian Fund’ closed with a loss of -5.4%. ‘Markaz Islamic Fund’ focused on the Kuwait market closed the quarter with a loss of -6.7% against the benchmark loss of -9.9%. ‘Forsa Financial Fund’, an option market maker, declined by -10.9% YTD.
International Investments
The year 2011 started off on a mixed note. While Energy and Precious metals sectors were performing better, the rest of the sectors didn’t quite do well. Inflation fears caused a bit of volatility across the markets, so much so that it prompted rate hikes even from central banks in certain developed markets. ECB gave in early April, increasing the key interest rate to 1.25%. Stories of Chinese asset bubble fears continued. Euro area fiscal deficits remain a recurring theme, accompanied with downgrades of debt ratings.
For Q1 2011, Markaz International Investment Funds did quite well, the proprietary book returned 3.22% in Q1. Similarly, the themes based fund, ‘Atlas EMT Fund’, was up 3.02% in Q1. The ‘ETF program’, trading a slew of ETFs, has generated a return of 2.62%. ‘Markaz Creative Investment Program’, which is modeled on hedge fund style of investing, has returned 1.54% and the ‘Atlas diversified Fund’ posted a gain of 0.39%.
For the rest of the year, the outlook is reasonably optimistic on markets, with an improving macro situation for US and an easing of political turbulences in the emerging markets. But the inflationary pressures expected to gather pace in both emerging and developed countries could derail the markets from time to time. Markaz will continue to keep a bullish stance on the commodity sector on the back of rising demand, dollar weakness and political unrest.
Private Equity
The Private Equity industry has seen substantial progress through the Q1 2011. PE exits are at a record high. ‘Markaz Private Equity portfolio’ year to date return was 2.55% as of the end of Q1 2011.
Corporate Finance Advisory
The region’s business landscape continues to undergo a significant transformation, with a pressing need for deleveraging and restructuring the debt of companies for better sustainability. Notwithstanding the political events in the region, there has been a strong appetite from regional and foreign financial institution to acquire distressed debt, and few transactions have taken place. This was encouraging as it provided the market with benchmarks to price credit default, and helped banks and creditors to agree on realistic debt restructuring plans.
Markaz continues to build strong capabilities in distressed debt and restructuring of creditors, which is helping us win asset management as well investment banking mandates in the distressed space. In particular, the Department is focusing on providing advisory services related to restructuring liabilities of companies, disposing non-core assets for clients, and raising fresh capital for local corporations.
The Kuwait Development Plan is making steady progress, with two projects currently being tendered, Al-Zour Water and Power Project and the Kuwait Health Assurance Company. Markaz believe that the success of these two projects will bring a strong stimulus to the capital market in Kuwait.
In Q1, Markaz won the ‘Best Investment Bank’ in Kuwait award by Global Finance magazine, in its 2011 listing of the World’s Best Investment Banks.
Fixed Income
The recent upheaval in regional countries had weakened investors’ sentiment and negatively impacted GCC countries’ CDS and rating during Q1 2011. Bahrain and Saudi Arabia CDS increased by 78.15% at 62.79% respectively, while Bahrain also faced a country rating downgrade by Fitch Ratings from A- to BBB. Total GCC bonds & sukuk issuance was USD 5.68 billion as of 31 March 2010, while HSBC/NASDAQ Dubai GCC US Dollar Sukuk/Bond Index recorded a slight decrease of 0.16%.
At the outset of the year, Markaz launched ‘Markaz Fixed Income Fund' to provide investors with a venue for low volatility asset class. The Fund’s capital is variable from USD15-100 million, and aims at investing in high quality bonds and Sukuk issued by GCC government and private entities. Despite the regional upheaval, the Fund’s performance remained stable and recorded decrease marginal decline in Q1 2010 of 0.2%, which reflects the high quality of the portfolio and its well diversification. The team continues to offer high net worth clients and large institutions with custom-made fixed income portfolio to assist them meet their financial targets and optimum level of diversification.
Structured Finance
Markaz continues to be the only market maker for Options at the Kuwait Stock Exchange (KSE) since 2005. Markaz is still trying to develop and activate the Options Market given its direct advantages to the Kuwaiti Market in general and the Derivatives Market in particular. The number of stocks traded in the Options Market at the Kuwait Stock Exchange (KSE) has decreased in Q1 due to a shortage in liquidity in the market, and a 9.47% YTD decline in the weighted index.
The total number of traded contracts in Q1 was 1,475 totaling KD 907,526, which represents a decline of 52.2% in traded contracts and a 73.6% decline in the value of contracts traded in comparison to Q1 2010. The total number of options contract shares traded within this period was 47.573 million shares, for the value of KD 11.602 million.
MENA Real Estate
Markaz MENA Real Estate team manages investments across the region, including developing land, residential and commercial buildings as well as managing income generating real estate assets.
In Q1 2011, Kuwait real estate market showed mixed signs with the investment sector accelerating its recovery, while the commercial sector remaining stable and the office sector is still lurking on the week side. ‘Markaz Real Estate Fund’, with a low allocation to adversely affected commercial real estate, achieved a positive performance of 3.03% during Q1 2011, and continues to distribute a monthly cash dividend amounting to 7% annually.
On the development side, Markaz continues managing its investments in Lebanon, KSA, Jordan, Syria, Abu Dhabi and Qatar. During Q1 2011, progress has been made towards completing one of Markaz residential developments in Lebanon, while work continues for the remaining investments as planned, with efforts multiplied for exiting residential developments in Jordan and land development in KSA. In Q1 2011, the Saudi Market continued its positive momentum albeit at a poised pace with prices itching upward especially in the residential segment, Markaz is currently developing villas in the outskirt of the city of Al-Khobar.
International Real Estate
Several factors in the last 18 months have contributed to the stabilization of commercial real estate values in the U.S; fundamentals have started to improve, driven by signs of an economic recovery led by Government stimulus and a stronger corporate sector. Notwithstanding the above, over $1.2 trillion of commercial real estate mortgages mature in the next four years, and leveraged borrowers and lenders will continue to face challenges going forward refinancing maturing debt.
Consistent with this outlook, the team has focused on the preservation of capital values for Markaz existing funds. Towards this, in the first quarter of 2011, Markaz successfully secured the extension of the mortgage loan for the Phoenix property in the Markaz U.S. Multifamily Realty Investment Unit – IV (fund IV). This concluded Markaz refinancing efforts and now each of Markaz three funds have medium-to long-term debt financing in place in order to allow organized sale efforts.
Markaz have also entered into a sale MOU for the properties in the Markaz U.S. Industrial Realty Investment Unit – I (fund I) at a value of $170 million (relative to the original cost of $157 million); the sale is expected to be concluded in the second quarter of this year.
Oil and Gas
The Oil & Gas sector performance was mixed during Q1 2011. Oil prices rose more than 16% mainly driven by the turmoil in the Middle East and the devastating earthquake, tsunami and nuclear disaster in Japan. In line with stronger oil prices, international energy equities performed well during the quarter. On the other hand, regional energy equities, declined during the period as a result of the regional turmoil.
Markaz Energy Fund (MEF), was able to capitalize on the gains in the international markets through increasing its exposure to internationally listed energy equities to 12.6% of assets by the end of Q1 2011. MEF’s investments in international energy equities significantly supported the funds positive performance gaining 11.8% during Q1.
MEF’s investment in Kuwait First Transportation Company (KFTC) continues to perform as scheduled. KFTC has recently completed a strategy development exercise conducted by a reputable international consultant to identify expansion opportunities. The recommendations are currently being considered for implementation, including exploring acquisition opportunities.
Overall MEF gained approximately 1% in Q1, and continues to examine potential investment opportunities that that have considerable growth potential, in the drilling and oilfield services segments in the MENA region.
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Photo Caption: Mr. Diraar Alghanim, Markaz Chairman and Managing Director.
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About Kuwait Financial Centre “Markaz”
Kuwait Financial Centre 'Markaz', with total assets under management of over KD 960 million as of March 31st, 2010, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997