‘Pent-up demand’ to lift GCC markets, says law firm boss

Reuters

• High interest rates and the war in Ukraine muted trading last year 
• MCSI GCC index closed 2022 with a 6.4% year-on-year decline
• Region’s healthy IPO activity set to continue 

Appetite for GCC debt and equity will pick up this year after a sluggish 12 months, as investors take comfort in a more predictable interest rate environment and the region’s relative political calm. 

That is according to Jonathan Fried, Middle East managing partner of global law firm Linklaters, who took over the reins heading up the firm’s regional business from Scott Campbell in December.  

In an interview with AGBI, Fried said: “I’m quite confident about the level of Gulf capital markets activity for this year because oil prices have been at elevated levels, economies are doing quite well and the region has been relatively calm.

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“This means that for global fixed income investors, GCC equity and debt is quite an attractive proposition and there is a lot of appetite for it generally. 

“Given the relative absence of, or diminution of, borrowing levels over the past year, we think there’s going to be a lot of pent-up demand that will need to be serviced over the next 12 months.”

Fried, who was the firm’s Middle East head of capital markets before taking over the managing partner role last month, said he expects interest rates globally to stay high in 2023.

“At least now there is a stabilisation of the outlook regarding interest rates, and that gives market participants the confidence to price, issue and launch deals,” he said.

There is no single standout market to watch this year, according to Fried – all six GCC markets “will be quite busy”. 

“Obviously there are the headline-grabbing jurisdictions – the big ones like Saudi Arabia will continue to be busy,” he said.

“It has a young population, the economy is diversifying under Vision 2030 and there is a strategic government that wants to achieve things and achieve them well. 

“Similarly the UAE and different emirates within it will be quite buoyant, and Qatar, Kuwait, Bahrain and Oman, too. Lawyers and bankers will need to be nimble in terms of the types of product they are able to support them with.”

Gulf stock markets suffered declines in 2022, with the MSCI GCC index closing the year with an annual drop of 6.4 percent after seeing one of the biggest gains globally in 2021. 

An analysis of GCC indices earlier this month by Kuwait-based investment company Kamco Invest noted that markets were impacted by escalating global inflation and steps taken by international central banks to temper that with unprecedented interest rate hikes. The ongoing crisis in Ukraine compounded investor uncertainty. 

Qatar reported the most significant decline in 2022, with the DSM Index receding by 8.1 percent year-on-year. Saudi Arabia followed, dropping by 7.1 percent, the first decline in the Saudi index in six years.

Abu Dhabi was the best-performing market in the GCC with an annual gain of 20.3 percent, according to Kamco, followed by Oman and Bahrain with increases of 17.6 percent and 5.5 percent respectively. 

Globally equity markets also saw declines last year and initial public offering (IPO) volumes were at their lowest level since 2008, dropping 45 percent year on year with total proceeds down 61 percent, according to professional services firm EY.

The sluggish global picture contributed to the declines in Gulf capital markets, especially the impact of rising interest rates, Fried said. “That has obviously had the effect of tempering capital markets activity because it makes borrowing less attractive.” 

Geopolitical uncertainty caused by the conflict between Russia and Ukraine also had a negative impact, he added, while higher oil prices have, paradoxically, been another contributing factor. 

“The enhanced liquidity that elevated oil prices brings into the local economies, banks, sovereigns and their entities, just takes away a bit of the incentive to borrow,” Fried said. 

Middle East and North Africa IPO activity bucked the downward global trend last year, generating around $22 billion from more than 50 listings, according to Bloomberg.

Fried said he expected the IPO run to continue in 2023. “We’ve seen a good number of successful listings in the region, and I suspect there will be a period in which that will need to be analysed and digested, but I see no reason why we wouldn’t expect further listings in 2023.” 

The sentiment in the UAE was endorsed this week by Mohamed Khalifa Al Hadari, deputy CEO of the Emirates Securities and Commodities Authority.

He told delegates at the inaugural Mena IPO Summit in Dubai that 11 IPOs are “waiting in the pipeline” in the UAE, with a total value exceeding AED8 billion ($2.2 billion).

He also predicted that the Abu Dhabi Securities Exchange could also list 13 additional companies this year, including four from outside the UAE.

“The current flurry of activity is more sustainable than the previous IPO booms as it is part of the wider well defined government strategy to expand diversity to supply the markets,” Al Hadari said.