Boom time as TECOM leads the Gulf IPO resurgence

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• Abu Dhabi and Saudi Arabia vie to be top performing exchange
• MENA equity markets exceeded expectations in 2021
• Big regional companies expected to list at some point

As Dubai announced plans to sell a 12.5 percent stake in business park operator TECOM today – its second public offering this year after Dubai Electricity and Water Authority (DEWA) – Middle Eastern bourses have generally defied the downward international trend with increases in trading activity and values amid a robust pipeline of initial public offerings (IPOs).

The painstaking reform process that the region’s markets have engaged in over the past decade is finally bearing fruit.

Much of the focus in the region’s capital markets was on gaining entry to the MSCI Emerging Market Index, which several, notably Saudi Arabia, eventually achieved. 

This has started to exert a positive impact. IPO activity held up even as regional stock markets sold off sharply in May of this year.

In contrast, Middle Eastern bourses are still some of the best performing in the world this year.

This has fed a healthy competition between the strongest regional exchanges.

“Abu Dhabi and Saudi Arabia continue to fight for the top position over the last five months with very close returns,” says Junaid Ansari, head of Investment Strategy & Research at Kuwait-based Kamco Invest. 

“Currently Abu Dhabi leads with a return of 18.5 percent followed by Saudi Arabia with a return of 14.5 percent. Kuwait and Qatar have returns of 11.1 percent.”

After recording their highest annual return in 14 years (since the financial crisis) in 2021 with a gain of 34.9 percent, GCC markets continue to lead globally this year with a YTD-2022 return of 12.4 percent, while most other markets are showing a decline as of the end of May 2022 as seen from the 13.5 percent fall in the MSCI World index. 

According to Ansari the GCC market gains are supported by oil prices that in turn support economic development and non-oil investment. This has underpinned private sector activity.

In addition, banks — the second-biggest sector in the region — continue to see better earnings backed by strong lending activity as well as expectations of higher interest rates. 

Stellar performance

MENA equity markets saw a stellar performance during 2021, with most generating double-digit returns.

The top performer was Abu Dhabi, with a return of 68 percent, followed by the Saudi Tadawul, its index up by 30 percent for the year.  

Inflows into the GCC have been facilitated by index inclusion, which incentivised passive providers and mutual funds to boost their exposures. 

Saudi stocks were added to the MSCI Emerging Market and the MSCI ACW indices in 2019, while another index provider, FTSE Russell, placed the kingdom onto its global equity index one year later.

This has swelled foreign holdings of listed Saudi equities, which now exceeds $60 billion. 

Kuwait joined the MSCI EM Index in 2020, triggering $3.1 billion of foreign capital inflows. The UAE and Qatar were already on the EM index. 

Inclusion in the MSCI EM Index has provided much-needed liquidity in regional exchanges over the last several years.

“The prerequisites for inclusion also led to a number of regulatory developments in the regional exchanges,” Ansari says.

“This included transparency, better timing, products offered and better valuations.

“And when markets stabilised there was a flurry of new companies wanting to raise capital to expand in line with strategic visions of countries in the region.”

These new companies are now exposed to a much wider group of investors both in the region as well as internationally, resulting in better valuations.

This is evident from the consistently net positive inflows from foreign investors over the last few years in GCC exchanges.

Regional capital markets have taken regulatory measures to compete with international exchanges.

For example, the likes of Boursa Kuwait, Abu Dhabi Exchange (ADX), DFM, the Bahrain Bourse and Tadawul have issued environmental, social and governance (ESG) guidelines while making it compulsory for listed companies to publish sustainability reports.

More products needed

MENA exchanges want to stimulate liquidity by getting more active listings pipelines, while also offering new financial products such as derivatives and digital assets. 

There is also evidence of structural additions at the central securities depository (CSD) level.

Saudi Arabia’s Securities Depository Centre Company agreed with Euroclear and Clearstream to give international investors access to the country’s sukuk and bond markets from March 2022.

The UAE, Kuwait and Saudi exchanges have either established or are establishing central counterparty clearing houses (CCPs) to support their derivatives markets.

The listing of state-owned enterprises gives a lot of confidence to investors and is a step in the right direction.

And the pipeline remains strong as seen from the recent announcements. But analysts say more needs to be done. 

“Regulators have added many new products over the last few years in the run up to be included in the EM indices,” Ansari says.

“However, there is still a lot to do when compared to markets in other emerging countries.”

So far this year the Middle East stands out as the only region worldwide to register an uptick in the value of public listings in the first quarter versus the same period last year.

Bumper listings bonanza

Gulf IPOs recorded a record first half of 2022 on the back of rising oil prices. 

In the first five months of 2022 the Gulf raised $11.4 billion, according to data compiled by Bloomberg. The latest of these, a share sale in UAE’s petrochemical giant Borouge in late May, raised $2bn. 

Amount raised in Middle East IPOs in first half of the year

The 15 listings compares to three IPOs in Q1 2021, according to EY figures. In contrast, global IPO volumes during Q1 2022 fell 37 percent.

Saudi Arabia dominated listings activity in Q1 2022 with 6 IPOs on Tadawul’s Main Market and seven IPOs on the Nomu-Parallel Market (which has lighter listing requirements), for a total of 13 IPOs raising $3.9bn.  

“Mena IPO activity is delivering new opportunities for investors and bucking the global trend,” says Brad Watson, EY Mena strategy and transactions leader.

“The breadth of industry sectors that have been listed also reflects a more widespread return to strong economic growth across the region, with IPOs in consumer cyclicals, technology, basic materials, healthcare and the energy sector.”

Saudi Arabia Airlines and Emirates to list?

The outlook for continued IPO activity across the entire region remains positive, with the possibility of some of the biggest regional companies – the likes of Saudi Arabia Airlines and Emirates – listing further down the line. 

IPOs continue to attract foreign interest, with overseas inflows seen across all exchanges.

The Ukraine conflict and its ripple effects are not putting investors off, noted one analyst. 

“Due to the dependence on oil, Gulf exchanges benefitted from the increase in oil prices that came as a result of the Ukraine situation,” he says.

“In addition, sectors like tourism and real estate have also seen a revival in the post-pandemic era.”

For all the positive momentum this year, MENA region capital markets still face challenges. 

Markets in the region lack the product depth seen in advanced capital markets.

Though exchanges and regulators have added numerous new offerings and platforms, this is yet to reach the levels seen in other emerging markets.

Sector concentration is another major obstacle, wherein a few stocks and sectors account for the bulk of the market activity. 

“This is a very gradual process of diversification that has picked up pace but still years away from the ideal size,” Ansari says.

“On the other hand, the transition from retail investors to institutional investors has been successful in most markets in the region, and that adds to the stability of the markets in times of volatility.”

Middle East equity market indicators

	Price index	YTD %	Trading value	Market cap, $bn
Lebanon	135.5	44.1	25.6	15.3
Jordan	392.9	12.7	33.3	26.2
Egypt	218.6	-28.2	129.4	34.9
Saudi Arabia	558.9	9	8070.3	3,236
Qatar	212.3	6.6	658.3	196.6
UAE	149.2	1.2	2664.6	652.3
Oman	228.3	4.8	34	18.8
Bahrain	188	2.9	5	28.6
Kuwait	144.6	8.4	931.5	134.1
Iraq	n/a	0.5	n/a	11.1
Source: Bank Audi/Rabee Securities