This article which reviews the performance of the Amman Bourse last year, was prepared by Capital investment, the Investments, arm of Capital Bank
The year 2006 was a turning point for the Amman Stock Exchange (ASE) as the bubble created in preceding years burst, and a sharp correction, which began towards the end of 2005, forced the ASE index into a downward spiral that extended throughout the entire year.
The poor performance of the ASE can be attributed to a combination of factors including excessively high stock valuations, further increases in interest rates, and a large number of primary market issues that absorbed a great deal of liquidity from the market.
Meanwhile, sharp drops in all the regional stock markets made for generally low investor confidence, while a large segment of highly leveraged short-term investors further exacerbated the effects of the decline.
The index closed out the year at 5518.1 points, dropping by 32.6 per cent from its level a year earlier, after having reached its lowest closing for the year at 5267.3 points on Dec. 17, 2006. The ASE's total market capitalisation declined by 21.0 per cent to stand at JD21.08 billion at year-end, representing around 272 per cent of projected gross domestic product (GDP) for 2006.
Total trading volume thinned notably during the year to reach JD13.85 billion, down by 14.4 per cent from 2005 levels. However, the total number of shares traded more than doubled during the year to reach 4.0 billion, due to a combination of excessive stock dividend distributions, new share issuances, as well as relatively lower stock valuations as compared to 2005.
The aforementioned correction was not unique to the ASE as overvalued stocks and increasingly low investor morale, coupled with deteriorating political conditions throughout the region, caused prices on most regional stock markets to take a downward trend.
The ASE ranked 6th among selected regional markets in terms of the percentage change in general index. Only three of the selected markets witnessed an appreciation in market indices, with Oman recording the largest increase of around 14.5 per cent. Egypt came in second with a 10.7 per cent increase, followed by Bahrain with a mere 1.0 per cent increase.
Five markets showed poorer performance than the ASE, with Saudi Arabia witnessing the sharpest decline in index reaching 52.5 per cent.
Economy in figures
Strong domestic consumer demand, increased government expenditure, and heightened foreign direct investment caused Jordan's economy to continue its growth in 2006, however, at a slower pace than the growth achieved in the past couple of years.
According to the Department of Statistics, GDP growth during the first three quarters of 2006 reached 6.3 per cent at constant prices and 11.9 per cent at current prices, compared to 7.4 per cent and 11.7 per cent respectively during the same period of 2005.The International Monetary Fund (IMF) expects real GDP growth of around 6.0 per cent in both 2006 and 2007.
In spite of the 61.6 per cent drop in foreign grants, the overall budget deficit narrowed to JD90.5 million during the first ten months of 2006, compared to an overall deficit of JD205.3 million during the same period of 2005, mainly due to growth in tax and non-tax revenues by around 20.8 per cent and 32.8 per cent respectively, along with the 51.3 per cent reduction in oil subsidies.
Jordan's net outstanding total debt (domestic and external) for the period ending October 2006 decreased slightly to JD7.340 billion, or 94.8 per cent of estimated GDP for 2006. This compares to JD7.494 billion at the end of 2005 or 102.5 per cent of Jordan's GDP for that year. External debt accounted for 5.163 billion of total outstanding debt, while domestic debt reached JD2.177 billion at the end of October 2006.
Surging energy prices during 2005 and most of 2006 began to show effects on consumer prices as the consumer price index (CPI) increased by 6.25 per cent during 2006. The country's unemployment rate dropped to 13.9 per cent in 2006 from 14.8 per cent a year earlier.
On the monetary front, interest rates continued their upward motion through July of 2006, as the Central Bank of Jordan (CBJ) raised the rediscount and repo rates four times to reach 7.50 per cent and 8.50 per cent respectively, while the overnight deposit window rate was raised three times to reach 5.25 per cent.
In January 2007, Moody's Investors Service revised its outlook on Jordan's sovereign ratings to stable, after having placed a negative outlook in January of 2006. This revision reflects Moody's increased confidence in the country's ability to finance its large external current account deficit and the government's success in containing fiscal pressures.
New developments in the ASE
The ASE witnessed many new developments during 2006 as stock market institutions were active in adopting new procedures and implementing new regulations aimed at enhancing market depth and providing for more efficient trading activity. These developments were as follows:
-- In March, the Jordan Securities Commission (JSC) issued new regulations enabling companies to repurchase five per cent of their issued shares as treasury stock, while allowing a higher limit of 10 per cent provided prior approval from the JSC is obtained. Under the new regulations, companies are required to hold the purchased shares for a minimum of six months and a maximum of 18 months from the date of the initial purchase.
The CBJ issued similar regulations permitting banks to purchase five per cent of their issued capital, provided that capital adequacies and liquidity positions are maintained at comfortable levels.
-- In April, the ASE developed a new market in which investors can trade their rights to participate in a public offering at a price set by the ASE based on the formula: (adjusted opening share price - subscription price). Trading of the subscription rights resumes for five days from the JSC's approval of the offering.
-- As of June 2006, the ASE adopted a new index that is weighted by market capitalisation, but based on free-floated shares rather than total listed shares. The weight of each company's share in the index does not exceed 10 per cent, such that large cap companies have a limited influence on the index.
In addition, the ASE rearranged sector classifications to include three major sectors and 23 subsectors, thus facilitating peer group comparisons and improving the presentation of data for analytical purposes.
-- The JSC discussed new procedures concerning capital adequacy requirements of brokerage firms where, as of June 4, 2006, all receivables must be collected within one week from the date the debt arises. A grace period was granted to brokers to clear previously withdrawn accounts by the beginning of 2007.
The regulations aimed to eliminate the one-week allowance and implement 100 per cent cash trading as of Jan. 1, 2007. However, the JSC has since postponed the implementation of this regulation until the beginning of 2008.
-- The JSC also revised the rules and regulations governing margin trading, while several brokerage firms were awarded new licenses to perform margin trading, thus boosting liquidity in the market.
-- During the first half of 2006, Jordan's stock market institutions signed three memoranda of understanding with their counterparts in the United Arab Emirates aiming to enhance supervision, regulate dual listing procedures and maintain records of securities ownership among the bourses. In September, the Securities Depository Center (SDC) announced the success of its trials to connect the local stock market with the Dubai and Abu Dhabi bourses.
-- In a step taken to improve the accessibility of information to investors, the SDC introduced a new service on its website enabling investors to view their transactions and holdings. On a similar note, the JSC began publishing the portfolios of listed companies' board members on both the JSC and SDC websites.
Main corporate actions
During 2006, 25 new companies with a combined paid up capital of JD444.6 million were listed on the ASE, bringing the overall number of companies listed in the first and second markets to 227.
Banking sector:
-- In January, Arab Bank increased its paid up capital to JD356 million by offering 176 million shares for private subscription at a price of JD6 per share, in addition to the allocation of four million shares as treasury stock to be distributed to the Jordan Armed Forces at a preferential price.
Arab Bank also acquired a 50 per cent stake in Al Nisr Al Arabi Insurance Company by doubling the company's paid-up capital to JD5 million at a price of JD4.5 per share. The bank, in alliance with BankMED of Lebanon, purchased 91 per cent of MNG Bank of Turkey leaving Arab Bank with a 49.9 per cent stake.
To enhance its presence in all European Union countries, Arab Bank began restructuring its branches under Arab Bank - Europe in London, with a paid up capital of 500 million euros. By September 2006, Arab Bank had received all necessary approvals to be cross-listed on the Abu Dhabi Stock Market.
-- The Housing Bank for Trade and Finance increased its capital to JD250 million by capitalising JD50 million of retained earnings and reserves, in addition to offering 100 million shares for public subscription at a price of JD4 per share. The Housing Bank will allocate an additional two million shares as treasury stock for distribution to the Jordan Armed Forces.
-- Near the end of the year, Union Bank for Saving, and Investment's board of directors approved on a preliminary basis entering into a strategic partnership with National Bank of Kuwait (NBK). As per the initial negotiations, NBK may acquire a maximum 50 per cent stake in Union Bank through increasing its paid up capital and issuing new shares.
Insurance sector:
-- Arabian Seas Insurance Company increased its paid up capital from JD2 million to JD21 million by allocating 16.5 million shares to its strategic partner Global Investment House (Global) at a price of JD1.5 per share, allocating 500,000 shares to existing shareholders at JD1.5 per share to be paid by Global, in addition to offering two million shares to shareholders at par.
-- Arab German Insurance Company capitalizsed JD1.392 million of its retained earnings, increasing its capital to JD7.192 million as of last April. In December, the JSC approved a further JD3.208 million increase in capital resulting from the merger with Al Bassmah Commercial Company Shares of Arab German Insurance (AGI) have been suspended from trading since May 17, 2006 due to merger procedures. AGI's share price closed at JD1.53 at the end of the last trading session.
Services sector:
-- The Executive Privatisation Commission opted to sell part of the government's remaining 41.5 per cent stake in Jordan Telecom by means of private placements to Joint Investment Telecommunication Company "JITCO" (a subsidiary of France Telecom) and the Kuwaiti Al Noor Company, in addition to a public offering.
The government retained a 15.7 per cent stake in Jordan Telecom, while France Telecom holds the majority stake of 50 per cent through JITCO, which may purchase another one per cent of the company's shares. Jordan Telecom shares were suspended from trading between June 28, 2006 and October 8, 2006 due to privatisation procedures.
-- United Arab Investors (UAI) increased its capital to JD150 million through allocating 30 million shares to strategic partners, after the substantial 80 million-share increase that took place towards the end of 2005. During the year, Aman for Securities, a subsidiary of UAI, increased its capital from JD30 million to JD65 million, amid plans to purchase Osool Investments and Financial Services.
Aman and Osool, together with Al Mal Capital - Dubai, are working to establish the largest local brokerage company under the name Al Mal Securities.
-- Tameer Jordan , a real estate investment company, was listed in the second market as of June 5, 2006 with a paid up capital of around JD212 million, representing the year's largest Initial Public Offering (IPO).
-- Union Investment Corporation's (UIC) shares were suspended from trading as of August 24, 2006, due to merger procedures with "Al Jabal Company for Residential Projects". UIC's share closed at JD2.60 at the end of its last trading session.
Industrial sector:
As part of its privatisation programme, the Jordanian government sold 37 per cent of its 65.6 per cent stake in Jordan Phosphate Mines to the Brunei Investment Agency at a price of JD2.80 per share, representing a 33 per cent discount to the stock's last closing price before its suspension from trading on March 5, 2006. The share resumed trading on March 30, 2006.
-- Jordan Steel increased its capital to JD23.075 million through a public offering of six million shares to existing shareholders at JD2 per share, along with the allocation of two million shares to two strategic investors at JD5 per share, and 75,000 shares to company employees.
Part of these proceeds were used to establish a steel melting plant that is in its final stages and is expected to begin supplying Jordan Steel with raw materials during the first quarter of 2007.
-- In December, Jordan Cement Factories' board of directors announced that the company will take a JD14.1 million provision as part of its employee early retirement scheme.
The company's more-than-50 years of monopolistic control over the local market is expected to come to an end in the near future as stiff competition is foreseen with three different cement companies planning to start operating in the country.
A downturn in corporate earnings
Though many companies listed on the ASE continued to show growth in operational income, overall corporate earnings took a turn for the worse as investment income dropped significantly, where in many cases, companies recorded losses from investments.
According to our estimates for companies that issued financial statements during 2006, 141 companies are expected to realise profits for the year, amounting to around JD1.25 billion.
53 companies are likely to record losses estimated at JD67.4 million for the year. This compares to 162 companies achieving profits of JD1.335 billion, and 24 companies showing losses of JD27.0 million in 2005.
Insurance sector posts steepest decline
After all sector indices shot up during the boom in 2005, prices of shares in all sectors shared in the downward spiral of 2006, with the industrial sector index being the smallest loser to drop 13.6 per cent, while the insurance sector took the hardest hit, dropping by a significant 43.7 per cent.
Active primary market boosts overall market capitalisation
Market capitalisation was boosted by the large number of newly listed shares during 2006, leading to a slighter decline of 21.0 per cent, significantly less than the drop in the ASE index. The total value of shares issued during the first eleven months of 2006 reached JD2,338.8 million, JD464.6 million of which represented shares of newly established companies, while the remaining JD1,874.2 million were shares of previously listed companies.
The banking sector, which accounted for 56.4 per cent of total market capitalisation at end-2006, showed the largest drop in market capitalisation reaching 28.4 per cent, noting that the banking sector had led the growth in 2005. The three largest new share listings in the sector, represented by Arab Bank, The Housing Bank for Trade and Finance, and Jordan Kuwait Bank, injected JD1,056 million, JD400 million, and JD45 million of cash into the market respectively.
In the absence of such large primary issues, the banking sector market capitalisation would have showed a much more drastic decline.
The services sector managed to limit its decline in market capitalisation to 5.1 per cent, as a substantial portion of primary market issues represented service companies. Accordingly, this sector's contribution to total market capitalization increased from 19.8 per cent in 2005 to 23.8 per cent in 2006.
Non-Jordanians own 42% of the ASE's value
Classifying ownership in the ASE in terms of investors' nationalities, non-Jordanians represented 42.0 per cent of total market capitalisation at the end of 2006, while Jordanians maintained a 58.0 per cent ownership.
Saudi Arabian investors held the largest percentage of market capitalisation among non-Jordanians reaching 10.1 per cent, followed by Kuwaiti, Lebanese, and Qatari investors constituting 6.4 per cent, 3.9 per cent, and 3.1 per cent of total market capitalisation respectively.
Trading volume thins by 14.4%
Total trading volume at the ASE thinned by 14.4 per cent to JD13.9 billion. Trading volume in the banking sector halved during the year bringing the sector's contribution to total trading volume down to 19.8 per cent from 34.1 per cent a year earlier.
The services sector was the only sector to show growth in volumes which reached JD9.1 billion, accounting for 65.8 per cent of overall market volume for the year.
These volume statistics exclude block trades amounting to JD352.0 million in 2006, compared to JD687.3 million in 2005, while also excluding the JD4.9 million trading volume on rights issues in 2006.
More brokerage companies compete for smaller pie
The surge in trading volumes that took place in 2005 sparked heightened interest among business people to establish brokerage firms, hoping to gain a piece of the growing pie. During 2006, the number of licensed brokerage houses grew from 48 to 63 at year-end. Contrary to initial expectations, volumes decreased during the year with more companies chasing after a smaller market.
The top 15 brokers in terms of trading activity accounted for around 55 per cent of total trading volumes for the year. Ahli Brokerage Company achieved the largest trading volume reaching JD1.64 billion. Several institutions transferred their brokerage activities to separate firms. Adjustments were made to trading activity figures to reflect these changes.
© Jordan Times 2007
