Kuwaiti stocks toil but analysts foresee 2024 rebound

October 13, 2023, 3:27 AM

Hoping for a rebound: an investor keeps track of prices at the Kuwaiti bourse

Kuwait stock market among Mena’s poorest-performing
Blue-chip market down 11.4%
Trading volumes down 36%

Overpriced valuations, high interest rates and oil production cuts have sapped investor confidence in Kuwait, and the country’s stock market is among the Mena region’s worst performers this year.

Despite this, analysts predict a sustained rebound in crude prices, steady corporate earnings and renewed government infrastructure spending.

This could boost ebbing sentiment and spark a late-year equity rally as buying demand increases ahead of dividend pay-outs.

Kuwait’s premier market, which features the country’s blue-chip stocks, is down 11.4 percent this year to October 11, while the broader all-share benchmark has fallen 9.6 percent over the same period. In contrast, Dubai is up 22.4 percent and Saudi Arabia’s benchmark has gained about 1 percent.

“We believe the market is oversold, especially looking at positive earnings performance as well as elevated oil prices,” said Junaid Ansari, director of investment strategy and research at Kuwait’s Kamco Investment Co.

“Kuwait also has significant untapped potential on the economic front with a strong project pipeline and solid family businesses that are IPO candidates when the market improves. We expect some recovery in the market by year-end.”

He attributes the slump in heavyweight stocks to a lack of catalysts “in the market, in terms of economic as well as company-specific factors”.

He also highlighted how Kuwait’s premier market had been trading at a sizeable premium to other Gulf markets until March this year. With little positive news to spur stock buying, investors instead booked profits.

“(A) lack of new listings also added to the sub-optimal performance of the index, especially when compared with markets such as Abu Dhabi, Dubai and Saudi Arabia,” said Ansari.

Trading recovery

Trading activity has also slumped. Average daily volumes were down 35.8 percent in the first nine months of 2023 versus full-year 2022 according to AGBI calculations based on Kamco Invest data. Average daily turnover has fallen 35.6 percent.

Foreign investors, including those from other GCC countries, have been net sellers of Kuwait stocks this year.

“We expect recovery in trading activity for the rest of the year as well as in 2024 led by dividend announcements,” said Ansari.

MR Raghu, chief executive of Kuwait’s Marmore Mena Intelligence, attributed the weak performance of Kuwait’s bourse to Opec+ oil production cuts, crude price volatility, rising interest rates and sticky inflation.

“Higher interest rates have impacted consumer spending and investment,” he said, noting a spate of de-listings had also sapped investor sentiment.

Yet trading activity could improve in 2024 as Kuwait benefits from high oil prices and if central banks begin cutting interest rates as widely forecast, Raghu said. When rates are high, investors are more likely to keep money in cash to earn interest on savings accounts, rather than risk buying stocks.

Banking worries

The banking sector, the bourse’s largest and most important, has struggled. Shares in Kuwait Finance House and National Bank of Kuwait, the country’s two largest lenders by assets and more than five times the size of their next biggest rivals, have fallen 5.6 and 16.7 percent respectively.

Mid-tier banks have also toiled, with Gulf Bank and Burgan Bank both posting double-digit share price declines.

Bank stocks’ slump is partly due to fears that higher interest rates will impact credit growth, said Ansari.

“The pressure on lending was apparent” in July and August, he said, citing the most recent central bank data that shows total loans declined slightly.

Yet higher rates are positive for banks’ net interest income, Ansari said, noting banks combined second-quarter profits were a record high of $1.4 billion.

Bank profits will “remain elevated in the near term as the full impact of higher rates are reflected in the earnings”, said Ansari.

Investors are also worried about Kuwait banks’ exposure to Turkey and Egypt, he said. Both countries are suffering precipitous declines in their currencies and, as such, banks’ earnings in Egyptian pounds and Turkish lira will be much diminished when converted into Kuwaiti dinars.

Banks are hardly bargains from a price-to-earnings perspective despite the recent stock slump. National Bank of Kuwait was trading at a PE ratio of 13.1 as of September 30, according to data from Kamco Invest, while Kuwait Finance House’s is 19.4. Boubyan Bank’s PE was 36.3 even though its shares have fallen by about one-fifth this year.

Nonetheless, Kamco is overweight on Kuwait’s banking industry, and Marmore’s Raghu is similarly optimistic on the industry’s prospects.

“Kuwaiti banks remain well-capitalised and are less prone to systemic risks,” said Raghu. “The non-performing loans of banks have been relatively moderate, indicating a stable outlook for the sector.”

On the bourse, various other sectors are similarly in the red this year. Energy was down 15.6 percent as of September 30, while industrials (-14.7 percent), telecommunications (-9.2 percent) and technology (-20.2 percent) are other notable losers.

Insurance stocks have bucked the downbeat trend, with the sector’s stocks up more than 40 percent this year, and investors are likely to cash in some of these gains, Ansari added.