GCC Stock Markets: Bold but not Beautiful?

Comparing GCC with the most developed and emerging markets, its stock markets doesn’t get much coverage. GCC which stands for Gulf Council Cooperation and consists of 6 oil rich Arab nations: Kuwait, Qatar, Oman, Bahrain, Saudi Arabia and United Arab Emirates (U.A.E.).

After 1971, GCC nations have pegged their currencies to US Dollar to ensure their stability and they need United States as their major trading partner for oil. These are the exchange rates of these respective countries to US Dollar:

Source: Faisal Photography 

The four largest GCC equity markets together enjoy less than a third of other regions, with that available often restricted to large stocks, leaving mid cap and small cap stocks mostly ignored from the spectrum. Current crisis in Middle East (Syrian War, Qatar Embargo and Saudi controversy) has disrupted the markets in the region. In addition, Qatar now wants to leave the OPEC since it has very influence in the oil market. How much that impact would be in the coming days is a question too. Already, Qataris and Qataris are barred from the GCC stock markets after the  2017 Qatar Embargo. There is an absence of international independent research institutions which provide limited research.  According to Reuters, at the beginning of 2016, the biggest company in GCC, SABIC has a market cap of $61.6 billion only had 17 reports compared to India’s Tata Consultancy Services (market cap of $69.3 billion) with 155 reports and 303 reports on Apple Inc. (market cap $560.2 billion). SABIC is a Saudi manufacturing company which is active in petrochemicals, industrial polymers, fertilizers, chemicals and metals. It is the largest public company in the Middle East and Saudi Arabia as listed in Tadawul (Saudi Stock Exchange). SABIC’s 70% shares are owned by the Public Investment Fund of Saudi Arabia. (Arabian Business, 2016). The remaining private shareholders are from Saudi Arabia and other GCC nations (Excluding Qataris after the 2017 Embargo).

Retail investors in some countries account for more than 70 to 80 percent of the liquidity, compared to companies in China where 85 percent of the trades are retail and in India over 70 percent of the market liquidity occurs due to foreign institutional investors. In the developed markets, the retail investors account for only 10 – 30 percent of liquidity and institutional investors account for the rest. The GCC markets have heavily depended on petroleum and less on the retail or any other industries. Although Dubai (UAE) is less dependent on oil revenues compared to its counterpart Abu Dhabi (UAE) and other GCC states, but still its stock market has been hit hardest in the region in recent months. Why is that? Its higher liquidity, exposure to foreign investors and deficiency of leveraged positions. Therefore, the important factors that determine the extent of analyst research coverage in a country are the amount of institutional investors, breadth and depth of the markets, amount of foreign investments, and number of players in the market and lastly, the clearness to provide progressive statements by companies. The vast presence of retail investors has led to investments that are mainly driven by opinions, assumptions and word of mouth information rather than analytical research. The top heavy nature of the GCC markets, along with low liquidity and lack of investor interest in the mid and small cap segments has resulted in declining analyst research in these segments. On the other hand, there is a lack of analyst write- ups in Arabic has also led to low consumption of research in the region. There is certainly an uneven corporate disclosures across the GCC region which results in low research.

There are delays in acquiring time- sensitive information and minimal public disclosures which discourage analysts from following companies and some countries seem to have very lenient regulations. Then, the declaration of financial results depends on the size of the companies, companies with large cap releasing information at a faster rate compared to mid and small companies. The region also lags behind its peers in the strict enforcement of corporate governance rules and stock exchange rules which has led to markets that are relatively inefficient. Among GCC countries, the extent of analyst coverage varies based on the above derived factors. For e.g. coverage is highest in Saudi Arabia followed by Qatar, United Arab Emirates and Kuwait. Barring Qatar, all other major GCC nations have over 88 percent analyst coverage for large cap stocks, due to the popularity of these stocks among the investors and comparatively higher amount of research and information available in the public domains. The coverage value declines the mid cap companies and falls further for small – cap companies. Despite, UAE as a popular financial hub, it still lags behind Saudi Arabia and Qatar in terms of the coverage of its markets, with almost one third of its stocks are covered by analysts. In other markets it is common to find more than five analysts covering large cap stocks, in the GCC such luxuries are restricted to Saudi Arabia and UAE; not very surprising for such a low flow of research. Post global financial crisis, GCC capital market regulators have tightened regulations concerning disclosures. These disclosures happened mostly on a bilateral basis with companies providing huge amounts of information to regulators but not dispersed freely for analysts to look around. In addition, increased regulations can add to compliance costs which can be burdensome for small and medium sized listed stocks, resulting them to delist.

The GCC countries are in the process of improving the exchange operations in order to attract more liquidity in the region. If the rules are appropriately controlled and applied, disclosures and filings will occur in a timely manner that would enable timely research to be conducted and draw investor interest. Practices that favor a select group of minority shareholders need to be curbed and minority investors protected to enhance institutional investor participation. Investment companies must also come under strict regulations to ensure control over leveraged positions and protection of investor interests.  New regulations are issued to improve the market attractiveness, but the strict enforcement of corporate governance and exchange rules is necessary to improve research coverage of respective country’s stocks.

The GCC stock markets are fundamentally more volatile than their developing market peers, due to the emerging stages of development. Consequently, handling this risk or instability is a key standards for recognized investor entry. A buy and hold environment may not be helpful, but availability of broader tools like options and future can provide volatility. Moreover, framework like short selling and stock selling practices needs to be developed, these will attract foreign investors and reduce market volatility.

In conclusion, bigger markets would to increase the market liquidity and limit volatility, this would increase poise for market participants and accordingly provide a striking destination for international investors.