The GCC Equity Research Dilemma

This article was published on Gulf news. you can read here

If you are a foreign investor looking to invest in a market, the first thing you look at is availability of “Research”. Research at an economy level, sector level and stock level will be the first point of evaluation in what is called as “secondary research” process. After ascertaining the view points by analysts, you then embark on “primary research” where you form your own opinion through interaction with various stakeholders including the company.

GCC has two major limitations in that sense. They are “under researched” and “hard to research”. The second factor may explain the first factor but they are not mutually reinforcing. While the “under researched” status is typical of any emerging/frontier markets, it is the second factor (hard to research) that is quite a local attribute.

Let us look at some statistics. At “Markaz” we publish an interesting piece on a monthly basis titled “GCC Equity Research Statistics” as per which only 100 GCC companies had research coverage out of a universe of 750 stocks. In other words, only 13% of companies enjoy research coverage with Qatar at the highest of the table (25%) and Kuwait lowest (5%). This may look very discouraging but is not out of trend. A recent Crisil report (Indian credit rating agency) states that only the top 100 of the nearly 3500 actively traded stocks receive some sort of research coverage in India. That’s just 3%.! Things look better when viewed from a market cap perspective. In that sense, nearly 57% coverage is noticed for GCC with Saudi Arabia ranking at the top (70%) and Bahrain at the lowest (26%). The high level of coverage in terms of market capitalization may be due to skewness in market structure dominated by large cap stocks. For eg., in the case of Saudi Arabia the top 6 companies (out of a universe of 136) account for 50% of the market cap while the top 18 companies account for 75% of the market cap. In a skewed market, it is possible to achieve scale in research in terms of market cap but not in terms of companies.

Let us examine this “hard to research” factor further. Access to companies and its management is a primary requirement to carry out equity research. Management discussions form an important element while giving research recommendations (buy, sell or hold). Even in situations where companies are proactively meeting analysts and provide forward looking guidance, still analysts get it right only 50% of the time or even less than that. You need the following to come up with credible research:

•Timely disclosure of performance
•Detailed disclosure
•Management discussions and view points
•Regular analysts meetings &
•Unbiased opinion


GCC companies on an average take time to bring out their results especially if it is yearend (requiring audit seal). For e.g., by the end of March 2010, only 67% of GCC companies declared their Q409/annual 2009 results with Kuwait at just 20%. This is nearly 3 months after the finish of the period. Even where results are available, only high level top line numbers are made available for quarterly performance (except the Q4) which makes it difficult to subject them to a detailed analysis. In many cases, they are posted as one/two liners on the stock exchange website in Arabic making it completely impossible to assess the performance. Hence, late reporting of financials coupled with weak reporting of financials makes it that much harder to form credible opinion.

Annual reports are a good place to articulate management thinking and “wish list” for the future. Warren Buffet set a new standard of extremely detailed management discussion which is now an international event where shareholders travel miles to listen to him and read his annual report giving it the same respect as any other reputed investment textbook. While it is harsh to expect such levels of discussion in GCC, most of the management discussion (labeled as chairman’s letter) is quite pedantic and repetitive in nature.

Analysts are viewed more as intruders into the privacy and hence are not normally granted audience. Even if they are granted audience, mostly they end up meeting financial controllers or in a more graceful situation the CFO. Access to the CEO is very limited or at best not available. However, this is different from market to market with Saudi Arabia being touted as the most difficult market to penetrate and engage companies in analyst’s discussions. Where such discussions take place, they are normally devoid of any forward looking guidance and may focus more on past performance. Lack of Arabic speaking analysts, especially locals, may be one factor at play here.

Till a few years back, it was taboo to give a “sell” recommendation lest you run the risk of incurring the wrath of the management through sensitive phone calls splashing all around. Hence, new terms have to be invented to replace the word “sell” (like caution). For e.g., among the 212 research notes published between Jan-march 2010, only 19 were sell while 131 were buy with rest hold. In few cases, it may be due to benign expectation of the stock market. However, in most cases, it is prudent not to issue a sell recommendation.

Rapid opening up of the market to foreign investors in terms of reducing the bar as well as inclusion of GCC markets in the MSCI Emerging market index will change this picture dramatically. Availability and quality of research may not be the criteria for inclusion in the index but once included active trading can happen only based on research coverage. Thanks to the arrival of portals like Zawya, financial information is easy to get by including annual reports. However, positive management attitude is extremely important to reach out to analysts and share information.



It should be noted that many listed companies are either majority family owned or government owned. In the past, these companies were little interested in broad basing their ownership structure and were guarding their control zealously. With no need to look at capital markets as a money raising venue, there was little interest to meet with analysts leave alone share information with. With banks and local shareholders coming under severe strain, companies have to increasingly look to diversity their shareholding and capital raising. Attracting quality institutional investors (foreign) as well as considering capital market as a viable place to raise capital (both debt and equity) will be the future trend for growth-aspiring companies. In both cases, research will form the basic foundation. Over the past few years, presence of foreign investment banks (like Goldman Sachs, Merrill Lynch, Morgan Stanley, Credit Suize, etc) has lent credibility to the research process.

Stock trading is a day time activity for many locals which explain the retail nature of the GCC stock markets. Speculative trading based on “inside information” is quite the norm and forms the bedrock for buying and selling. This leads to heightened volatility. Institutional participation in trading is less than 5%. Increasing research can enable to increase this share which can then attract more research to mid cap and small cap stocks thereby enabling a “positive feedback loop”. In many markets (like Kuwait/Qatar,etc) brokers do not offer sell-side research as investors/traders are not sophisticated enough to demand it. In addition, brokers are not equipped with qualified sell side analysts to carry out and publish updated equity research. In most cases, they issue flash notes on earnings announcements (not exceeding a paragraph).

In advanced economies, the efficacy and utility of broker-dealer “sell side” research has come in for some sharp commentary especially relating to its objectivity. Hence, institutional investors tend to rely more on independent research that may charge for their services but at least enjoy some objectivity. However, in the context of GCC, we are still not yet there even in terms of sell-side research leave alone independent research.

Looking forward, as the market capitalization keeps growing along with gradual relaxation of foreign investment limits, interest by foreign investment banks is bound to increase. This will herald the needed “research culture” which then will be followed by local players who till now view research more as a cost center. Demand for qualified and experienced analysts who specialize in GCC sectors will soar though availability may still be an issue. From a “depth” of coverage, the research will progress to “breadth” of coverage in pursuit of alpha through mid and small cap bets, though it may induce tracking error. However, in a zeal to pursue breadth, companies may be tempted to outsource research to low-cost outsourcers based in India thereby “templating” the process. Pursuit of quantity in lieu of quality may have negative consequences in the longer term in terms of research efficacy. Companies that are ahead on this thought process will gain rapid market share while the rest will be also-rans.