BEHIND BLUE CHIPS

Kuwait 2017 | FINANCE | FOCUS: BLUE-CHIP STOCKS

In a tumultuous year on Kuwait's trading floors, blue-chip stocks emerged as stable investments despite a liquidity crunch that laid bare the structural reforms needed to maintain high liquidity levels.

The tremendous bearing of Kuwait's banking and financial services segment recently came to the fore, when the Boursa Kuwait Securities Company (BKSC), the licensed operator of the Kuwait Stock Exchange (KSE), released its annual report. In 2016, Kuwait's banking sector accounted for the highest-valued number of traded stocks at KWD985 million, while trading in financial services' stocks ranked second at nearly KWD570 million. It should, therefore, come as no surprise that blue-chip stocks evolved as the protagonists in the recently privatized KSE's “game of trades” in 2016.

Over the past year, the privatization of the KSE was completed, as the newly established BKSC not only took over operations in April, but also became a licensed independent stock market in October. In spite of these institutional leaps forward, the KSE has nonetheless seen a fall in trading volumes of nearly 15 billion shares compared to 2015. This was mainly due to portfolio investors refraining from trading activities over the year, which continued a crunch in liquidity. Even though the highest valued blue chips of the National Bank of Kuwait (capitalized at KWD3.37 billion) and Kuwait Finance House (capitalized at KWD2.69 billion) remained stable for most of the year, a food company turned out to boost investors' confidence again in 3Q2016, raising liquidity in Kuwait's capital markets, with UAE-based Adeptio eventually buying a majority stake in Kuwait's food conglomerate flagship Americana Group (capitalized at KWD1.04 billion).

Although low oil prices also contributed to an overall decline in trading activities across the GCC in 2016, the current setup of Kuwait's capital markets not only undermines blue chips' performance, but further casts doubt on how profitable IPOs are for SMEs. For example, the 2014 capital market reforms now require listed companies to be audited by two firms and also increased the costs for going public. In light of macroeconomic downward movement, various smaller companies consequently decided to delist from the KSE, which had an adverse impact on the stock exchange as a trading hub. This downward spiral was particularly reflected in a recent report by market research firm almowazi.com, which outlined that five companies delisted from the stock exchange during the first half of 2016, while four were currently in the process of delisting in addition to another five that already gained preliminary approval.

In October 2016, however, Kuwait's sovereign wealth fund, the Kuwait Investment Authority (KIA), raised liquidity by KWD100 million, opting for small and medium chips. In return, this led to record-breaking buying of small caps during the first fiscal quarter of 2017. In order to maintain high trading activities and liquidity levels in the long run, Khaled Abdulrazzaq Al-Khaled, the Vice-Chairman & CEO of the BKSC, told TBY: “We are going to have a market maker introduced by the end of this year, and will introduce SLBs and short selling. We will also collaborate with the Kuwait Clearing Company (KCC) to introduce derivatives and options. In addition, we are going to enhance over-the-counter performance, which is a market nobody focuses on in the region, and later, we are going to focus on SMEs, which are a key part of the economy, especially in relation to diversification.”

At the same time, the Central Bank of Kuwait (CBK) introduced new regulatory procedures to ensure that liquidity levels do not only remain high, but also improve the efficiency of Kuwait's capital markets as such: Having introduced supplemental capital requirements and buffers for blue-chip companies, the CBK further hopes to stabilize the funding structures through new liquidity standards. This further entails an enhancement of the CBK's sharia supervisory activities—reforms that are particularly crucial in view of the unparalleled growth of the Islamic banking industry as a whole.