This article published in FT. click here to read
A capital market law passed recently by the Kuwaiti parliament has quickly become a hot topic. But, given the global and regional market turmoil and the huge losses suffered by local investors, this potentially critical development is being met with much scepticism.
The reason is that, except for Saudi Arabia, there is little empirical evidence to estimate the effect the new law is likely to have.
The Saudi CML came into effect in 2003 and statistics before and after this provide some clues on future performance in Kuwait, whose bourse has a market capitalisation in excess of $100bn. Many of the provisions of the Kuwait law mirror those of Saudi Arabia and, if Kuwait follows through as the Saudi regulator has done - a big "if" - the conclusions are broadly positive and sceptics may be confounded.
At a broad level, the number of companies listed on the Saudi exchange increased from 73 in 2004 to 136 in 2009, a near 90 per cent jump. Liquidity, as measured by average daily value traded, jumped from a modest $160,000 in 2004 to $1.3m in 2009, albeit with the help of oil prices.
More importantly, Saudi companies today are more prompt in disclosing their quarterly performances than previously. At the time of writing, nearly 95 per cent of Saudi companies had declared financial results for the fourth quarter of 2009 as against only 8 per cent for Kuwait.
The Saudi bourse has also experienced a qualitative jump in terms of stocks that dominate trading. Prior to the CML era, it was not uncommon to find penny stocks predominating.
The Saudi initial public offering market, which has stimulated frenzied interest among local investors, also received a fillip in terms of the number and size of issues. Public offerings (including private placements) swelled from $5.5bn in 2006 to $19bn in 2009.
The number of complaints received by the Saudi Capital Markets Authority, the regulator, dropped 75 per cent between 2006 and 2008, testimony to its increasing effectiveness. Voluntary investigations by the authority increased 82 per cent, mostly in the area of manipulation and insider trading. Officials even monitor websites to check abuses relating to stock recommendations.
The number of brokers (or authorised persons) swelled from a meagre eight in 2005 to 110 by 2008 and half of those were authorised to conduct all activities, such as dealing, managing, custody, arranging and advising.
Saudi Arabia is thus an interesting pointer to the potential shape of things to come in Kuwait. Not that such a result will necessarily be repeated, especially in areas such as stock numbers, where the Kuwait market has an abundance, with more than 200 shares listed.
Many of the shares (85 per cent) are micro caps with negligible trading, and at present belong to a distressed segment of financial and real estate companies.
However, the new law may offer a solution in terms of altering market structure by easing privatisation and consolidation. The hope is that this would then improve the composition of stocks that dominate trading volume. Last year, the top five traded stocks in volume terms on the Kuwait bourse enjoyed a cumulative market cap of just 1 per cent of total market value, as against 25per cent in Saudi Arabia.
Much of the debate centres on the composition of the CMA board, a five-member team to be nominated by the prime minister, and the speed with which the authority is set up.
It will be large in terms of manpower - the Saudi CMA employs nearly 500 staff - and needs planning and execution. Finding local talent is not a problem in Kuwait, but if the agency is not marketed properly, the local trading community might view it more as a policing exercise than part of genuine regulatory reform.
Measures such as this may eventually help Gulf Co-operation Council nations to close the gap with other emerging markets in terms of depth, breadth and performance. The underperformance of the region during 2009 relative to emerging markets should argue for such law changes.Click here to read the original article
