Middle East: towards innovation and transparency. Capital Markets Guide 2008

Transcription

1 Middle East: towards innovation and transparency. Capital Markets Guide 2008

2 Contents 01 Foreword 02 Market and economic overview 04 Focus on transparency and governance 06 Market insights 10 Economic overview 12 Market performance 19 Sector analysis 21 Admission requirements 22 Directory of markets 24 Grant Thornton International 25 Middle East capital markets contacts Methodology The 2008 Middle East Capital Markets Guide from Grant Thornton International Ltd (Grant Thornton International) analyses the performance of the 14 largest stock markets competing to list company stocks in the Middle East between 2005 and All markets are listed in the directory at the back of this guide. Information in this report was prepared by Grant Thornton International and was current at 31 December Grant Thornton International makes no representation as to the accuracy or completeness of information included in this report. Opinions in this report constitute the current judgement of the authors at the date of this report and should not be construed as advice to adopt any particular investment strategy. All figures have been converted into US dollars using the exchange rate prevailing at the time.

3 Middle East Capital Markets Guide 2008 Foreword Despite the global economic turmoil and stockmarket crash in the last quarter of 2008, capital markets in the Middle East are going through a period of unprecedented change. Boosted by high oil prices and heavy public sector spending, many economies in the region seem almost immune from the forces acting upon developed and emerging markets elsewhere. Vast flows of capital are moving around the region and seeking out global investment opportunities. In response to these conditions, Middle Eastern stock exchanges are growing in size and complexity, especially in the Gulf Cooperation Council (GCC) states. The region is also seeing considerable inflows of capital and expertise as investors in other parts of the world seek to profit from its strong growth. The partial withdrawal of retail investors after the collapse of some equity markets in 2006 has also had the effect of encouraging international institutions to enter the region s markets. This is not only contributing to capital market expansion, but also to a rapidly increasing financial sophistication. The region may be becoming more integrated with global capital markets, but this is development very much on Middle Eastern terms. The ongoing evolution of Islamic finance is a central element of growth as seen in the rapid growth of Sukuk bond markets as is heavy government involvement in the development of capital market infrastructures. Transparency and corporate governance too are becoming more important as Middle Eastern markets open up to international institutions. There is no doubt that real progress has been made, but any country aspiring to full market maturity will need to achieve significant further headway. The capital markets of the Middle East clearly have great potential for further growth. This Middle East markets guide reviews the key themes of change sweeping through the region, provides specific insights into four key Middle Eastern markets and compares the performances of the region s major stock exchanges. The 2008 Grant Thornton capital markets guide for the Middle East is a part of a series of capital markets guides that Grant Thornton International has compiled over seven years. If you are interested in obtaining other Grant Thornton capital markets guides, visit the publications section of Capital Markets Guide

4 Market overview Expansion and maturity of Middle Eastern capital markets The economies of the Middle East are growing rapidly. Rising oil and gas prices may be the dominant theme, but they are far from being the only story. Unprecedented levels of government spending are boosting economic diversification and stimulating consumer spending. The consequent flood of liquidity is most notable in the GCC states, but it is also spilling into the wider region and the wider world as surplus sovereign and private sector capital looks for investment opportunities. On average, total equity values are growing across the Middle East, and in some countries now exceed the total value of Gross Domestic Product (GDP). The trading volumes, market liquidity and index volatility of major Middle Eastern exchanges compare well with those of other emerging markets in Asia and Latin America. True, most of the region s main indices are dominated by a handful of companies, and some of the Middle East s smaller exchanges may be struggling to attract international capital due to the restrictive admission requirements of some markets. However there is a strong pipeline of Initial Public Offering (IPO) activity across the region, much of it privatisation-driven. The lack of liquidity for small and medium enterprises (SMEs), is now being addressed in the region with the establishment of Nilex in Egypt and other initiatives for the promotion of SMEs in Qatar and UAE. Middle Eastern capital flows are not all oneway. The region is attracting significant inward investment, lured by high growth rates, attractive demographics and an increasing openness to market forces. The 2006 collapse of equity bubbles in several Middle Eastern markets hurt local retail investors, but their partial withdrawal from stock markets has had some positive effects. Now that volatility has declined and valuations have fallen back, Middle Eastern markets look far more attractive to international institutions. 2 Capital Markets Guide 2008

5 This trend is illustrated by the growing number of Middle East and North Africa (MENA) investment funds in the developed world, and the increasing proliferation of Exchange Traded Funds (ETFs) offering Middle Eastern exposure to European investors. This increasing interest is a positive development for the long-term evolution of Middle Eastern capital markets. If the region s stock markets can continue to diversify, they will have taken a further significant step towards maturity. Increasing sophistication Middle Eastern capital markets are not just developing in size, they are fast becoming more sophisticated. The rapid flows of financial and human capital into the region are accelerating the natural evolution of local markets, several of which are becoming increasingly complex. Newly constructed financial hubs such as the Dubai International Financial Centre (DIFC) and the Qatar Financial Centre (QFC) have led the way in establishing a statutory environment designed to encourage development. In the space of just a few years, both have implemented entirely new legal and regulatory frameworks modelled on international regimes. This groundwork is now being complemented by a growing commercial infrastructure as legal, financial and accounting expertise floods into the region. As their traditional markets cool, investment banks are moving senior staff and global business heads to the Middle East. Global banks are also developing their regional capabilities beyond sales and distribution to include research, product development and risk management. The result is a rapid build-up of world class intellectual capital in the region. Innovation is becoming an increasing hallmark of the Middle Eastern capital markets. June 2008 saw the launch of Nilex, the Egyptian junior stock market, and Qatar is now planning a similar exchange. This opens a new era for Middle Eastern equity markets, and should boost the region s economic development by supporting medium sized companies. Product innovation is moving forward at pace too, with equity index futures being traded in Kuwait and planned for introduction in Egypt. Local derivatives markets will offer investors new hedging opportunities, and should help to bring greater depth to the cash markets. Short selling is not permitted on most Middle Eastern exchanges, but event-driven hedge funds and private equity investment funds are springing up. Global investment banks are also beginning to offer their clients synthetic ways to take short positions in the region s equity markets. Continuing evolution of Islamic finance The ongoing evolution of Islamic finance matches the increasing sophistication of Middle Eastern capital markets. Islamic finance is not a separate sector but a regional theme which now includes banking, mortgages, insurance, re-insurance, bonds, equities and even derivatives. Financial activity in the Middle East is certainly not all Shariahcompliant for example, the region s sovereign funds do not generally invest along Islamic lines but the market is growing. According to Euromoney 1, 53 per cent of investment funds in Saudi Arabia, 33 per cent in Qatar and 30 per cent in Kuwait and the UAE are already Shariahcompliant. Islamic finance is dominated by high net worth customers, but Islamic concepts are becoming more influential in the wholesale arena. There is increasing demand for Shariah-compliant investments, and dedicated Islamic financial institutions are providing corporate customers with new products. Islamic institutions have also become key drivers of IPO activity. The most significant long-term development is probably the rapid growth of Sukuk bond markets across the Middle East. Effective bond markets give companies a wider range of fund-raising options and are a key element of a mature financial system. Bahrain, Dubai and Qatar are competing for regional leadership in Islamic finance. Bahrain is stressing its well-established expertise, Dubai is developing Islamic frameworks for the offshore DIFC and Qatar hopes to capture onshore Islamic business. The availability of experienced bankers with Islamic expertise is the key limitation for many organisations, so efforts are being made to lure talent from existing hubs like Malaysia and smaller markets such as Pakistan. Islamic finance is still in the intermediate stages of its development. It is comparatively fragmented and remains relatively unpopular outside the Gulf. The absence of consistent standards and the tendency of Shariah boards to contradict each another suggest that a true regional market remains a long way off, but growth is strong and looks likely to continue into the foreseeable future. 1 Source: Shariah-compliant market tests perceptions 6th August 2008 Capital Markets Guide

6 Focus on transparency and governance The Middle East is engaged in a growing debate over transparency and corporate governance. Increasing recognition of the importance of these issues is due to increasing international interest in the region s stock markets. Although commentary on Middle Eastern transparency has tended to focus on sovereign wealth funds, improvement in the corporate sector would serve as a further catalyst for the region s capital markets and is arguably a more pressing priority. The disclosure of reliable financial information is critical for promoting activity in a stock exchange. The lack of transparency standards comparable to international levels is a key obstacle to the establishment of a stock market in Yemen and Syria. Libya is trying to overcome the difficulty, having established its first trading platform, the Libyan Stock Market, in The development of Middle Eastern capital markets in recent years could not have taken place without some improvement in transparency and governance, and there is plenty of change afoot across the region. Many exchanges and regulators have introduced new, stricter requirements for listed companies, and in Egypt this has led to hundreds of companies being de-listed from the stock market. In a parallel development, the new financial centres of the Gulf have set up regulatory regimes and listing requirements specifically intended to achieve world class standards of transparency and attract global investors. While Saudi Arabia's Tadawul is progressing towards international transparency standards, it introduced a new rule in August 2008 requesting the disclosure of listed companies' shareholding information. All the same, standards of transparency vary widely. The 2007 Regulatory Quality indicator published by the World Bank, measures the ability of the government to formulate and implement regulations for private sector development. This reveals the functionality of the regulatory framework, and shows how laws are applied in business transactions. The World Bank also measures the rule of law and control of corruption from a wide range of international sources and experts, therefore giving a rough idea of the willingness of international investors to do business in the country. 4 Capital Markets Guide 2008

7 Measuring governance The table shows how these variables are closely connected. The percentile shows the global rank of the selected countries on a scale. The index ranks the regulatory quality in Bahrain, UAE, Oman and Qatar as high compared with the rest of the region, although they are still a long way from reaching the high regulatory standards of the Scandinavian region. Jordan, Kuwait and Saudi Arabia have an average regulatory quality, while the rest of the region is seen as heavily corrupt and lacking an appropriate regulatory environment. Even in the region s more transparent markets, progress remains to be made. For example, commentary on the UAE in the market insights section of this guide describes how the goals of world class transparency are not always matched by reality. Corporate governance too, although much discussed, frequently remains opaque in practice. Further progress needs to be made on both fronts if Middle Eastern capital markets are to fulfil their promise and sustain the current pace of development into the longer term. Percentile Rank (0-100) Regulatory Rule of law Control of quality corruption Denmark Singapore United Kingdom New Zealand Australia Canada Germany Chile United States France Japan Bahrain Italy United Arab Emirates Oman Qatar Mexico Jordan Kuwait Tunisia Brazil Saudi Arabia Lebanon Kenya India China Egypt Russia Yemen Libya Ecuador Syria Iraq Iran Myanmar th-100th 75th-90th 50th-75th 25th-50th 10th-25th 0th-10th Source: Worldwide Governance Indicators, World Bank, 2008 Capital Markets Guide

8 Market insights Bahrain Like its GCC neighbours, Bahrain is benefiting from an economic boom. Fuelled by oil revenues and government investment in other sectors, Bahrain offers good opportunities to local and foreign capital via the Bahrain Stock Exchange (BSE), one of the most open capital markets in the region and an internationally recognised centre of Islamic finance. The Bahrain All Share Index (BASI) climbed by 24 per cent during 2007, building on its relatively stable performance during 2005 and This was in contrast to the more volatile markets of some other GCC countries, reflecting the long-term goals of typical Bahraini investors. Total market capitalisation of the BSE grew by 28 per cent during 2007, assisted by several new listings. Most of these were financial companies, the result of governmental efforts to build on long-standing banking expertise and develop Bahrain s capital markets framework. Bahrain has been a pioneer of Islamic finance regulation, and the value of the BSE s Sukuk listings has more than doubled over the past five years. The exchange is also a centre for investment funds, with the number of listed funds climbing rapidly in recent months. Bahrain is competing with Dubai and Qatar to become the key hub for capital flows in the Middle East. Bahrain s approach may be more conservative than those of its neighbours, but it has some key advantages. The greatest of these are its long experience in financial services and the expertise of the domestic workforce, a rare combination in the Middle East. Market transparency is relatively good in Bahrain, assisted by the market s small size and close scrutiny by the BSE, but there is scope for improvement in standards of corporate governance. The BASI has continued its steady growth during the first half of 2008, with more financial institutions likely to enter the market in the coming year. Bahrain is well placed to benefit from the growth of Islamic finance and the investment flows sweeping through the Middle East, and its capital markets should continue to attract regional and international attention. Bahrain s approach may be more conservative than those of its neighbours, but it has some key advantages. The greatest of these are its long experience in financial services and the expertise of the domestic workforce, a rare combination in the Middle East. Jassim Abdulaal Grant Thornton, Abdulaal Gulf Audit 6 Capital Markets Guide 2008

9 Egypt Egypt s economic growth rates continue their steady expansion, driven by ongoing macro reforms and growing non-hydrocarbon and service exports. Government and Foreign Direct Investment (FDI) continue to register new highs, reflecting the longterm opportunities offered by Egypt s growing diversification and its large and increasingly affluent population. The Cairo and Alexandria Stock Exchange (CASE) index climbed by 60 per cent in 2007, reflecting the attractive conditions of the economy and the market s longstanding openness to foreign investors. Growth in market capitalisation was slightly lower at 49 per cent, as the Capital Markets Authority (CMA) continued to tighten its listing criteria and remove companies from the exchange. The CASE 30 Index fell during the early months of 2008, prompted by the central bank s interest rate increase and the reaction of some foreign investors to changes to the fiscal framework. The interest rate rise cooled Egypt s real estate boom, and property development companies were particularly affected. Nonetheless, the index only declined by 7 per cent during the first half of The June 2008 launch of the Nilex junior stock market offers new scope for medium sized companies to raise capital within an appropriate regulatory and cost framework. There are currently just three companies listed on Nilex, but as the main stock market recovers more companies will take advantage of this new fundraising route. There is no doubt that poor standards of transparency and corporate governance are a potential drawback for Egypt when competing for international capital, although there is clear political and regulatory focus on these important issues. Inflation too is a potential threat to inward investment, having risen into double figures during the first half of The Egyptian economy and capital markets offer strong opportunities for long term investors. If the government, regulators and central bank can improve regulatory oversight and price stability, there is no reason why this potential should not be realised. The Egyptian economy and capital markets offer strong opportunities for long term investors. If the government, regulators and central bank can improve regulatory oversight and price stability, there is no reason why this potential should not be realised. Amr Fathalla Grant Thornton Consultants, Egypt Capital Markets Guide

10 Saudi Arabia The 2006 collapse of the Saudi Stock Exchange (Tadawul) destroyed over US$450 billion of wealth. This stunning decline was in stark contrast to the broader Saudi economy, which then, as now, was enjoying stable growth and low inflation. Oil generates the lion s share of Saudi national income, but accession to the World Trade Organization (WTO) has helped to boost foreign investment and improve the diversification of the economy. Since the Tadawul s fall the CMA has taken several steps to reduce the influence of local retail investors. First, foreign residents in Saudi were permitted to invest. Then the market was opened up to GCC nationals and funds. Next the CMA capped the permitted total participation in IPOs by Saudi individuals at 30 per cent. These developments helped the Tadawul All Share Index (TASI) to increase by 39 per cent during More recently, the CMA has issued numerous licences to international investment banks, which have built up their Riyadh operations in anticipation of further liberalisation. Even so, during the first half of 2008, Saudi nationals continued to dominate trading and the market remained susceptible to swings in sentiment. A significant turning point came in August 2008, with the announcement that non-residents would be allowed to hold Saudi shares via swap agreements with registered local intermediaries. This should give international institutions much easier access to the Middle East s biggest capital market. Despite the size of the Saudi stock market, standards of transparency and governance are still far from ideal. Things are moving in the right direction, but at the current rate of progress it will take Saudi Arabia a long time to catch up with regional best practice, let alone the standards of more developed markets. The Saudi market has the potential to be not only the largest in the region but also the most liquid and mature. Hopefully the progressive involvement of international institutions will drive forward transparency and governance in the Kingdom. The Saudi market has the potential to be not only the largest in the region but also the most liquid and mature. Hopefully the progressive involvement of international institutions will drive forward transparency and governance in the Kingdom. Akram F El Husseini Aldar Audit Bureau, Saudi Arabia 8 Capital Markets Guide 2008

11 In 2007, the UAE s stock markets delivered impressive performances that were driven by high net worth UAE and Saudi investors and inflows of international institutional capital. Hisham Farouk Grant Thornton, UAE United Arab Emirates The UAE enjoys one of the fastest growth rates in the Middle East. UAE governments are overseeing huge investment programmes and the economy is undergoing massive structural change. In 2007 this picture was matched by the UAE s stock markets. The Dubai Financial Market (DFM) and Abu Dhabi Securities Exchange (ADX) delivered returns of 34 per cent and 52 per cent respectively, impressive performances that were driven by high net worth UAE and Saudi investors and inflows of international institutional capital. Since the steep market falls of 2006 most small UAE investors have preferred to invest in the booming real estate market. The DFM and ADX are not the only stock exchanges in the UAE. The Dubai International Financial Exchange (DIFX) is a brand new exchange in the Dubai International Financial Centre (DIFC), an offshore zone central to Dubai s pursuit of regional financial leadership. The DIFX aspires to be the leading international capital market between Europe and Asia, and lists shares, structured products, Sukuk and conventional bonds. In October 2007, Dubai Ports World listed on the DIFX, and further major listings are expected as the Dubai government pursues its privatisation programme. The DIFX also hopes to work with local businesses and global companies seeking access to Middle Eastern capital. Uniquely, the DIFX has a dedicated regulator aiming to provide world class regulation and transparency. The DFM too is planning to tighten up its transparency requirements. Even on the DIFX however, standards are not always ideal. For instance, international investors researching Dubai Ports World s IPO were surprised by how little they could discover about the company. The DIFC s recently created Hawkamah corporate governance institute has also so far opted not to use its statutory powers. Inflation in the UAE is climbing fast, but the sheer scale of infrastructure investment should be enough to sustain economic growth. If transparency and corporate governance can be further improved, international institutions will continue to arrive and the UAE s capital markets should continue their rapid development. Capital Markets Guide

12 Economic overview The economies of the Middle East differ hugely. This is true both in terms of absolute national income and in terms of population, which ranges from about 70 million in Egypt and Iran to less than one million in Bahrain and Qatar. The differences are at their most extreme when comparing GDP per capita. On this measure Qatar is the third richest country after Luxembourg and Norway, while Yemen ranks among the world s poorest countries. Levels of economic growth across the Middle East are more comparable. Growth is generally strong, with the International Monetary Fund (IMF) predicting annual GDP growth rates in excess of 5 per cent for most in Every country has its own features, but there are some common themes driving economic growth across the region. High oil prices are generating vast government surpluses, which are driving heavy investment in infrastructure and expanding public sector wage bills. This in turn is stimulating consumer spending. The resulting tide of liquidity is spreading across the region, so that even countries without significant hydrocarbon reserves are benefiting from an economic boost. The natural result of rapid spending growth by Middle Eastern states and individuals is that inflation is climbing. The effects of soaring commodity and property prices are exacerbated by the fact that many of the region s currencies are pegged to the weak US dollar, preventing central banks from enforcing tighter monetary policy. Iran, Jordan, Qatar and Yemen are four states where the IMF expects annual inflation to reach double figures in Oil exporting countries can at least rely on high fiscal income to offset the effects of growing expenditure, but the region s more fiscally constrained countries are under greater pressure. This was illustrated recently when the Egyptian government was forced to raise interest rates and push up taxes. Inflation levels across the region are being closely scrutinised by investors, and could lead to a temporary slowdown in capital inflows. However, price increases should ease as the global economy cools, and the issue does not yet look like a serious threat to long-term growth in the region. 10 Capital Markets Guide 2008

13 This economic data has been incorporated to provide context for the market activity featured in this guide. Gross Domestic Product current prices (US$ billions) * 2008* Bahrain Egypt Iran Jordan Kuwait Lebanon Libya Oman Qatar Saudi Arabia Syria United Arab Emirates Yemen Inflation (%) * 2008* Bahrain Egypt Iran Jordan Kuwait Lebanon Libya Oman Qatar Saudi Arabia Syria United Arab Emirates Yemen Gross Domestic Product annual growth (%) * 2008* Bahrain Egypt Iran Jordan Kuwait Lebanon Libya Oman Qatar Saudi Arabia Syria United Arab Emirates Yemen Population (millions) * 2008* Bahrain Egypt Iran Jordan Kuwait Lebanon Libya Oman Qatar Saudi Arabia Syria United Arab Emirates Yemen Gross Domestic Product per head (US$ millions) * 2008* Bahrain 15,601 18,324 21,123 25,731 31,302 Egypt 1,137 1,270 1,489 1,739 2,016 Iran 2,390 2,746 3,197 4,149 5,042 Jordan 2,133 2,304 2,519 2,795 3,159 Kuwait 21,567 27,013 31,014 33,634 42,159 Lebanon 5,949 5,898 6,147 6,569 7,047 Libya 5,309 7,123 8,327 9,372 12,703 Oman 9,994 12,335 14,032 15,584 19,463 Qatar 41,949 53,333 62,914 72,849 95,167 Saudi Arabia 11,127 13,658 14,733 15,481 18,655 Syria 1,392 1,560 1,844 1,946 2,109 United Arab Emirates 27,595 32,392 38,613 42,934 50,383 Yemen ,126 Source: International Monetary Fund, World Economic Outlook Database, April *Forecast Capital Markets Guide

14 Market performance Market indices It is often claimed that Middle Eastern stock market returns do not correlate with equity markets elsewhere. This may or may not be true, but it is clear that the region s markets do not always correlate with each other. During 2005 the main indices of the Saudi Arabian, Dubai, Abu Dhabi, Lebanese and Palestinian exchanges soared hugely in value, only to fall back even more steeply during Over the same period however the main Kuwaiti, Omani and Bahraini indices avoided such speculative behaviour and enjoyed far steadier growth. In contrast, 2007 saw a much closer correlation between the region s stock markets, with almost all major indices recording steadier appreciation. Over the three year period from January 2005 to December 2007, most markets generated returns of 30 per cent or more, with the Kuwait Stock Exchange climbing by over 90 per cent and the Beirut Stock Exchange, Muscat Securities Market, Dubai Financial Market and the Cairo and Alexandria Stock Exchange all returning gains in excess of 100 per cent. These results outperformed the major US and European market indices, which appreciated by around 25 per cent and 45 per cent over the same period, even if they could not match Chinese rates of growth. Figure 1: Market indices Cairo & Alexandria Stock Exchanges Muscat Securities Market Dubai Financial Market Beirut Stock Exchange Kuwait Stock Exchange Palestine Securities Exchange Amman Stock Exchange Bahrain Stock Exchange Abu Dhabi Securities Exchange Saudi Stock Exchange Doha Securities Market Tehran Stock Exchange Iraq Stock Exchange January 2005 January 2006 January 2007 The market indices for all markets have been re-based to 1000 at 1 January 2005 Source: Stock Exchanges, Bloomberg and Federation of Euro-Asian Stock Exchanges. 12 Capital Markets Guide 2008

15 Some of the region s main indices have recorded falls during the first half of 2008, but there have been no dramatic declines. After enduring heavy losses in 2006, many retail investors have been slow to return to the equity markets, preferring to invest directly in property. The partial retreat of retail investors and the gradually growing involvement of institutional investors give greater grounds to hope that the gains of 2007 will be sustained into the medium term. Total market capitalisation Collectively, the stock exchanges of the Middle East represent one of the largest emerging markets in the world. Individually, they vary considerably in size. The Saudi Arabian stock market (Tadawul) remains by far the largest in the region, accounting for around a third of total market capitalisation. Although the data shown here indicates a slight decline in total market capitalisation for 2007, this is slightly misleading since figures for 2006 include some exceptionally high market values in the early months of the year. After the Tadawul, the next largest markets in the Middle East are the Dubai Financial Market (DFM), the Kuwait Stock Exchange (KSE) and the Cairo and Alexandria Stock Exchange (CASE). All of these markets have enjoyed several years of steady growth in market capitalisation and by the end of 2007 all were valued at over US$100 billion, indicating the increasing breadth and depth of the region s capital markets. It is also notable that the newly established Dubai International Financial Exchange (DIFX) had achieved a market capitalisation in excess of US$50 billion at the end of its first operational year, making it the seventh largest exchange in the Middle East. Behind the eight or so larger markets, the region s less valuable exchanges are relatively small in size, although most have registered steady growth in total value over the past three years. The growth in total market values is related to the region s rapidly growing wealth. The fact that total market capitalisation was close to or in excess of total GDP in 2007 for Kuwait, the UAE and Bahrain is a further indicator of the growing maturity of capital markets in the GCC states. Figure 2a: Average total market capitalisation (US$m) Amman Stock Exchange Bahrain Stock Exchange Beirut Stock Exchange Doha Securities Market Iraq Stock Exchange Muscat Securities Market Palestine Securities Exchange Tehran Stock Exchange Figure 2b: Average total market capitalisation (US$m) Abu Dhabi Securities Exchange Cairo & Alexandria Stock Exchanges Dubai Financial Market Kuwait Stock Exchange Saudi Stock Exchange This is the sum of the total market capitalisation at the end of each month in a given year, divided by 12. Information was not available for DIFX 33,085 33,557 31,918 23,254 18,869 16,417 8,992 7,305 3,208 70,451 66,270 82,645 1,664 1,577 1,650 19,258 15,895 13,722 2,500 2,770 2,973 42,184 36,221 42,250 95,936 98, , ,939 81,113 59, ,618 92,930 85, , , , , , , Capital Markets Guide

16 Number of companies listed The stock exchanges of the Middle East do not just vary in size, but also in numbers of companies listed. The Egyptian, Iranian, Omani and Jordanian markets have the largest listings in the region, but of these only the Egyptian market is significant from a market value perspective. In the past, the CASE listed hundreds of companies, but this has changed as the Egyptian CMA has sharpened the regulatory and transparency criteria for public companies. Hundreds of companies were delisted between 2005 and 2007 and this trend has continued during the first half of Away from the long established exchanges of Egypt and Iran, the trend is for a steady increase in listings across the Middle East. Most significantly, the larger stock markets of the GCC continue to open up to new entrants as regional governments pursue privatisation, and privately-owned businesses seek to take advantage of inward investment flows. The Dubai International Financial Exchange (DIFX) is one example of a market which has recently benefited from the listing of government owned companies, and which hopes to attract further public and private sector IPOs. Figure 3a: Number of companies listed (average in year) Abu Dhabi Securities Exchange Bahrain Stock Exchange Beirut Stock Exchange Doha Securities Market Dubai Financial Market Dubai International Financial Exchange Iraq Stock Exchange Palestine Securities Exchange Saudi Stock Exchange Figure 3b: Number of companies listed (average in year) Amman Stock Exchange Cairo & Alexandria Stock Exchanges Kuwait Stock Exchange Muscat Securities Market Tehran Stock Exchange This is the sum of the number of companies listed at the end of each month in a given year, divided by Capital Markets Guide 2008

17 Average market capitalisation per company The polarisation of Middle Eastern stock markets in terms of listings numbers and market capitalisation leads inevitably to wide variations in average market capitalisation per company. The Saudi Arabian, Dubai, Abu Dhabi and Qatari exchanges feature far larger companies than the rest of the region s markets, with average company values above the US$1 billion mark. Although not shown on the graph owing to lack of historical data, the DIFX should soon join this group, having attracted a handful of large companies to list since its launch. In comparison, figures for most other Middle Eastern exchanges are far smaller and in some cases average company capitalisation falls below US$100 million. Although these are not exceptionally small values by the standards of other developing markets, they can deter major global institutions with billions to invest, limiting investment appeal to smaller, local players. Furthermore, average company values are deceptive since exchanges in the Middle East are frequently dominated by a handful of local giants. The Saudi and Egyptian exchanges are just two examples of markets where half a dozen or fewer companies represent almost half of total market value. If these hyper-capitalised companies were to be stripped out, average company values would fall much further. This concentration is not unusual in emerging markets, but moving past this stage will be a crucial indicator of growing maturity for the region s stock markets. Figure 4a: Average market capitalisation per company (US$m) Amman Stock Exchange Bahrain Stock Exchange Beirut Stock Exchange Cairo & Alexandria Stock Exchanges Iraq Stock Exchange Kuwait Stock Exchange Muscat Securities Market Palestine Securities Exchange Tehran Stock Exchange Figure 4b: Average market capitalisation per company (US$m) Abu Dhabi Securities Exchange Doha Securities Market Dubai Financial Market ,506 1,670 2,247 1,896 1,934 2,662 1,868 2,498 3, Saudi Stock Exchange 4,675 6,612 6,588 This is the average total market capitalisation divided by the average number of companies listed. Information was not available for DIFX Capital Markets Guide

18 Monthly average turnover The picture of turnover across Middle Eastern exchanges reveals a high degree of concentration. The Saudi stock market remains by far the most active, boasting more than 60 per cent of the region s total turnover in 2007 on an average monthly basis. This reflects the exceptional levels of liquidity in the local economy and the continuing dominance of the Tadawul by retail investors. The KSE and DFM are distant runners up to the Tadawul in the turnover stakes, with the Qatari, Abu Dhabi, Jordanian and Egyptian bourses still further behind. The region s smaller exchanges have exceptionally low levels of trading. Up to a point, this polarised pattern illustrates the network effect at work among developing stock exchanges. Success breeds success, and larger markets will often expand faster as they attract large investors. In contrast, bourses failing to reach a critical mass struggle to attract significant amounts of secondary trading. All the same, patterns of turnover are not set in stone. The Tadawul s share of regional turnover has actually fallen from the 80 per cent levels seen in 2005 and In retrospect, the Saudi market s rapid boom and bust may have given a false impression of regional dominance. It will be interesting to see if the regional spread of trading volume shifts again as other GCC states compete for investment by international financial institutions. Figure 5a: Monthly average turnover (US$m) Abu Dhabi Securities Exchange Amman Stock Exchange Bahrain Stock Exchange Beirut Stock Exchange Cairo & Alexandria Stock Exchanges Doha Securities Market Dubai Financial Market Iraq Stock Exchange Kuwait Stock Exchange Muscat Securities Market Palestine Securities Exchange Tehran Stock Exchange 3,980 1,726 2,204 1,451 1,670 1, ,409 3,771 2,045 2,495 1,715 2,354 8,602 7,883 9, ,279 5,159 8, Figure 5b: Monthly average turnover (US$m) Saudi Stock Exchange 56, ,913 91, This is the annual value of share trades, divided by Information was not available for DIFX 16 Capital Markets Guide 2008

19 Monthly average liquidity Liquidity gives investors an indication of the ease with which they can convert securities into cash without suffering a price discount. In the data shown here, liquidity levels are a function of average monthly turnover and average market capitalisation, and once again show a wide variation across the stock exchanges of the Middle East. There is some loose correlation with total market values, with the Saudi exchange enjoying the highest level of liquidity in the region. Here, ratios above 15 per cent compare favourably with other developing markets such as Korea or Taiwan, although the restrictions on foreign ownership have limited the number of investors making use of that liquidity. The KSE and DFM are the next most liquid markets in the region, with ratios in the region of 8-9 per cent in Most of the region s other markets are characterised by relatively thin levels of liquidity. Figure 6a: Monthly average liquidity: turnover of shares as a % of total market capitalisation Abu Dhabi Securities Exchange Amman Stock Exchange Bahrain Stock Exchange Beirut Stock Exchange Cairo & Alexandria Stock Exchanges Doha Securities Market Iraq Stock Exchange Kuwait Stock Exchange Muscat Securities Market Palestine Securities Exchange Tehran Stock Exchange Figure 6b: Monthly average liquidity: turnover of shares as a % of total market capitalisation Dubai Financial Market Saudi Stock Exchange This is the sum of the US dollar value of all share trades in that month divided by the total market capitalisation at the end of each month in a given year, divided by 12. Information was not available for DIFX Capital Markets Guide

20 Volatility Volatility figures reflect the rate at which market prices move up and down. Higher volatility tends to be correlated with less mature economies and less well established exchanges, and although it can deter some investors it is also a natural stage in the development of many markets. As more investors seek to take advantage of the speculative gains which volatility can offer, market size and liquidity increase and prices become more stable. However the opposite sometimes holds true in other words, low volatility can also be a reflection of extremely low levels of trading activity. Both of these factors are at work in the volatility figures for the Middle Eastern stock markets. On the one hand, several of the region s more developed markets in Saudi Arabia, Dubai, Abu Dhabi and Qatar recorded month-on-month volatility of 8-10 per cent in This is a fairly typical figure for emerging stock markets around the world and would be unlikely to deter experienced institutional investors looking for long term returns. However the exceptionally low volatility of the Tehran exchange (1.6 per cent in 2007) is not so much an indicator of economic maturity as a sign of an extremely shallow market. Figure 7: Volatility (%) Abu Dhabi Securities Exchange Amman Stock Exchange Bahrain Stock Exchange Beirut Stock Exchange Cairo & Alexandria Stock Exchanges Doha Securities Market Dubai Financial Market Dubai International Financial Exchange Iraq Stock Exchange Kuwait Stock Exchange Muscat Securities Market Palestine Securities Exchange Saudi Stock Exchange Tehran Stock Exchange This is the annual average of the month-to-month percentage variation in the index value. Information was not available for all markets for all years Source: Stock Exchanges, Bloomberg and Federation of Euro-Asian Stock Exchanges. 18 Capital Markets Guide 2008

21 Sector analysis This analysis is based on the number of companies in each sector, as defined by each stock market. Abu Dhabi Securities Exchange Basic industries: 22% Consumer industries: 6% Financial services: 47% Retail: 6% Telecoms: 6% Others: 13% Amman Stock Exchange Basic industries: 16% Consumer industries: 14% Energy & mining: 7% Financial services: 29% Property: 13% Retail & leisure: 5% Transport: 10% Others: 6% Bahrain Stock Exchange Basic industries: 14% Financial services: 64% Property: 2% Retail & leisure: 10% Telecoms: 6% Transport: 4% Cairo & Alexandria Stock Exchanges Basic industries: 35% Consumer industries: 17% Drugs & healthcare: 6% Energy & mining: 1% Financial services: 28% Retail & leisure: 11% Telecoms: 2% Media & Internet: 1% Doha Securities Market Basic industries: 28% Consumer industries: 3% Drugs & healthcare: 2% Financial services: 35% Property: 5% Retail & leisure: 23% Telecoms: 2% Transport: 2% Dubai Financial Market Basic industries: 7% Consumer industries: 8% Energy & mining: 2% Financial services: 61% Property: 15% Telecoms: 2% Transport: 7% Kuwait Stock Exchange Basic industries: 23% Consumer industries: 5% Financial services: 36% Property: 23% Retail & leisure: 4% Transport: 5% Others: 5% Muscat Securities Market Basic industries: 40% Consumer industries: 7% Drugs & healthcare: 2% Energy & mining: 3% Financial services: 38% Media & Internet: 2% Retail & leisure: 3% Others: 5% Saudi Stock Exchange Basic industries: 39% Consumer industries: 6% Financial services: 31% Property: 6% Retail & leisure: 8% Transport: 4% Others: 6% Source: As reported by individual markets. Information was not available for all markets. Due to rounding all figures may not add up to 100. Capital Markets Guide

22 Sector analysis (continued) In terms of sector composition, Middle Eastern capital markets differ from many other emerging markets. Bourses in Asia or Latin America have typically been defined by the development of heavy industries and consumer goods, in response to domestic development needs and overseas demand for cheap export goods. Middle Eastern economies tend to be dominated by the hydrocarbons industry, but most exploration and production assets are state owned. As the region s governments seek to diversify their economies, it is mainly non-oil sectors that have been coming to market. With nearby Asian economies churning out consumer goods, investment has been heaviest in financial services and public sector infrastructure. The natural consequence is that stock markets in the region tend to be dominated by the banking, insurance, financial and basic industries sectors. The latter definition includes private companies working in the oil and gas sector and construction industries supporting the development of public infrastructure such as roads, airports, schools and hospitals. Also, the introduction of mandatory insurance classes by some governments has also contributed to the growth of the insurance market. Other significant sectors include: leisure and tourism (especially in Egypt, Dubai and Qatar), telecommunications, property and real estate most notably in the booming markets of Dubai and Kuwait. 20 Capital Markets Guide 2008

23 Admission requirements Exchange Paid-in capital (US$) Years of business Minimum number activity of shareholders Bahrain Bahrain Stock Exchange 1.3m Egypt Cairo & Alexandria Stock Exchanges 3.8m Iran Tehran Stock Exchange 2.0m 3 2,000 Jordan Amman Stock Exchange 0.7m Kuwait Kuwait Stock Exchange 37.8m Lebanon Beirut Stock Exchange 3.0m 3 50 Libya Libyan Stock Market Oman Muscat Securities Market 5.2m Palestine Palestine Securities Exchange 1.4m Qatar Doha Securities Market 11.0m 30 United Arab Emirates Abu Dhabi Securities Exchange 5.4m 2 Dubai Financial Market 6.8m 2 Dubai International Financial Exchange 50.0m 3 Note: most markets state that the shareholders equity should not be lower than the paid-up capital. A company might be required to list on the second board before being admitted to the main board. Foreign companies: in some cases these are subjected to stricter admission requirements in termes of capital, assets and shareholders.they must already be listed on the home country s stock exchange and have a representative office in the country/territory. Some markets may have additional requirements. Foreign companies are not admitted to listing on the Tehran Stock Exchange All figures shown are US dollar equivalents. Information was not available for all markets. Capital Markets Guide

24 Directory of main markets Exchange/Market Established Number of Number of Number of companies companies companies 31 Dec Dec Dec 07 Bahrain Bahrain Stock Exchange (BSE) Egypt Cairo & Alexandria Stock Exchanges (CASE) Iran Tehran Stock Exchange (TSE) Iraq Iraq Stock Exchange (ISX) Jordan Amman Stock Exchange (ASE) Kuwait Kuwait Stock Exchange (KSE) Lebanon Beirut Stock Exchange (BSE) Libya Libyan Stock Market 2007 Oman Muscat Securities Market (MSM) Palestine Palestine Securities Exchange (PSE) Qatar Doha Securities Market (DSE) Saudi Arabia Saudi Stock Exchange (Tadawul) United Arab Emirates Abu Dhabi Securities Exchange (ADX) Dubai Financial Market (DFM) Dubai International Financial Exchange (DIFX) Source: Individual markets and Federation of Euro-Asian Stock Exchanges. Information was not available for all markets for all years. 22 Capital Markets Guide 2008

25 Total market Total market Total market Ave market Ave market Ave market Website Telephone capitalisation capitalisation capitalisation capitalisation capitalisation capitalisation 31 Dec Dec Dec 07 per company per company per company (US$m) (US$m) (US$m) 31 Dec Dec Dec 07 (US$m) (US$m) (US$m) 17,367 21,122 27, bahrainstock.com ,517 93, , egyptse.com ,724 37,943 45, iranbourse.com ,143 1,472 1, isx-iq.net ,611 29,730 41, ase.com.jo , , , kuwaitse.com ,917 8,304 10, bse.com.lb lsm.gov.ly ,269 16,158 26, msm.gov.om ,461 2,727 2, p-s-e.com ,104 60,909 95,512 2,722 1,692 2,388 dsm.com.qa , , ,897 8,442 3,800 4,675 tadawul.com.sa ,952 80, ,114 1,965 1,346 1,892 adx.ae ,453 84, ,024 3,815 1,842 2,194 dfm.co.ae difx.ae Capital Markets Guide