GCC regional equity markets continue to scale new peaks buoyed by a global rally and increasing oil prices. The S&P GCC Composite Index has gained over 20% for the year. The liquidity glut sloshing around global markets has fueled the rally. Following the COVID-19 pandemic, central banks worldwide have eased money supply and increased the availability of credit at near zero interest rates to stem economic fallout. RAGHU MANDAGOLATHUR delves further.
However, the capital has found its way into financial markets, stoking concerns of asset price inflation. Supportive factors such as the rollout of vaccination programs and the announcement of reform measures have aided the market momentum. The full economic impact of the COVID-19 pandemic is yet to be reflected in corporate earnings, as the loan deferral programs have been extended several times to provide relief to SMEs, banks and stressed-out sectors. Once the true picture emerges, market valuations that currently are at a premium may revert to historical averages.
Capital markets in the region should be the enablers of capital-raising. We have witnessed vibrant and robust debt issuances especially Sukuk in 2020 in response to increasing deficits. However, we cannot say the same for equity issuances. However, with easy monetary policies unlikely to be reversed anytime soon and asset price inflation being the order of the day, it may be worthwhile to stem the spate of delisting and steer efforts toward increasing the supply of equity stock in the GCC region.
Spate of delistings
Recently, Investcorp Holdings that manages more than US$35 billion volunteered to delist from the Bahrain Bourse in response to low trading volumes. Similarly, in the Dubai Financial Market, firms including Emaar Malls and DXB Entertainment which operates theme parks and resorts wanted to go private. Earlier in NASDAQ Dubai, DP World went private and Emirate REIT was considering delisting from NASDAQ Dubai. Apparently, the operational costs of being listed, and its associated disclosure and transparency requirements, are being commensurate enough with the advantages of being listed.
However, for an emerging region such as the GCC, which has huge infrastructural investment needs, a buoyant and active capital market is critical where Islamic financing can play a key role. Active capital markets would be a prime institution that could cost-effectively allocate savings into investments as seen by sovereign Sukuk issuances even with poor credit ratings like that of Oman. The current spate of delisting moves needs to be arrested and investor confidence revived. To this end, the lopsided structure of the current equity market that is dominated by banking companies needs to be tackled. Large private companies, state-owned enterprises and new-age start-ups could be encouraged to list to expand the market breadth.
Governments could take the lead and divest stakes at prime valuations
The disruption caused by COVID-19 led to a slump in new equity issuances (IPOs) in the GCC region. In 2020, the GCC region witnessed only seven IPOs that in aggregate raised US$1.78 billion as against 12 issues that in aggregate raised US$33.03 billion a year earlier (EY Mena IPO Eye).
With most GCC markets trading at high valuation multiples, governments could take the lead by selling their stakes in key state holding companies. In addition to raising capital to boost the state coffers, the move could provide an impetus for the acceleration of privatization programs. Consequently, the privatization of state assets could enhance thrust on value enhancement to the benefit of all stakeholders. GCC governments will be well advised to factor in Islamic debt issuances as well in order to achieve a capital structure balance for large public–private partnership projects.
New-age companies could evince investors’ interest
Shares in public entities belong primarily to old businesses that are capital-intensive and they may not elicit the kind of response as the new-age businesses that are capital-light and digitally-driven.
Every crisis presents an opportunity and the COVID-19 shakeout could propel certain start-ups/businesses to the forefront. Venture capital and private equity firms that hitherto had catered to the capital needs of start-ups in the region could make use of the current environment to take them public.
For long, despite being included in the MSCI Emerging Market (EM) Index, the regional markets have remained underweight in the investor’s portfolio. GCC countries in aggregate account for approximately 5% of the weight in the MSCI EM Index. However, this is quite low in comparison with that of countries such as China (37%), Taiwan (13.8%), South Korea (13.1%) and India (10.0%) (weights based on iShares Emerging Market ETF [exchange-traded fund]). With the emergence of environmental, social and governance (ESG) investing, the energy sector is seeing diminished interest from global fund managers with the EM Index allocating only 5.3% to the sector while the tech sector leads with 36%. In the context of the GCC, Islamic products can be a superior substitute for ESG as it enjoys a longer history of ethical investing.
The region has its share of success in the technology space. UAE-based Emerging Markets Property Group that operates digital platforms such as zamee.com, bayut.com, mubawaba.ma, Kaidee, Lamudi and Dubizzle is a unicorn (worth over US$1billion). International players had earlier acquired the region’s successful start-ups such as Talabat, Careem and Souq. Addressing the poor representation of GCC companies in the listed technology space could enthuse new vigor in the regional capital markets including the Islamic market.
Raghu Mandagolathur is CEO of Marmore MENA Intelligence. He can be contacted at [email protected].