Jul 21 2012
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The Gulf Increasingly Seen as a Safe Haven
The performance of the regional equity markets provided a study in contrasts. In the words of Chief Economist Dr Jarmo T. Kotilaine of the National Commercial Bank, "The regional bourses reacted sharply to the external uncertainty during Q2 with both valuations and trading volumes hit virtually across the board. In spite of this, new IPO activity reached its highest level since 2Q09, USD1.1bn, although the number of new offerings was only four. While it may be too soon to speak of a trend, signs are multiplying that the long period of minimal activity in the regional IPO space may now be over." Even as the regional secondary markets lost much of the gains they had made during the opening months of the year, both in terms of valuations and volumes, Q2 came to account for a lion's share of the primary offerings during the first half of the year. In the aggregate, 1H12 saw six IPOs worth USD1.2bn. Saudi Arabia remains by far the dominant center of IPO activity in the region, accounting for three of the four offering in Q2 and five of the six in 1H12. A 31% rally on Tadawul between November and April, accompanied by a sharp rise in volumes, helped create auspicious conditions for new offerings. The only other GCC market to see primary activity was Oman - the only other regional stock market to have experienced any IPOs during the past year. Saudi issuance in Q2 totaled USD945.6mn in value whereas the one Omani IPO was worth USD159.0mn.
After two stronq quarters, conventional bond issuance in the GCC was hit in Q2 by the external market stress. Nonetheless, significant new activity did take place, with considerable foreign investor interest in the international issues. Moreover, during a time of a relative retreat by corporates, the quarter saw a landmark USD1.5bn issue by the Kingdom of Bahrain while Oman and Kuwait continued their ongoing bond issuance. All in all, the quarter witnessed 22 GCC conventional bond issues with maturities in excess of a year. Their aggregate value reached USD4.6bn, roughly equally split between corporate (USD2.2bn) and sovereign (USD2.4bn) issuance. Although this total was somewhat down on the 1Q12 figure of USD5.9bn, the performance of the market must be deemed generally impressive in view of the external conditions. In the words of Kotilaine, "While it is clear that Western investors were active buyers of GCC issues, important development took place also on the supply side. In particular, there are growing indications of bonds increasingly playing a role as the classic tire 'reserve tire' As some jurisdictions continue to face restrictions in the area of bank funding, bond issuance is in many cases services as an alternative. For instance, the UAE Central Bank has imposed more restrictive rules on bank lending to government-related entities, pushing more of them to the capital market."
The regional secondary markets were characterized by relatively benign trading conditions throughout the quarter in spite of external market stress. Both the bond and sukuk yields have remained at historically low levels, even if temporary spikes attest to the continued sensitivity to exogenous shocks. Sukuk have continued to enjoy an edge over conventional bonds, marking their increasingly established popularity as an asset class and a perceived relative safe haven. "Most issuers are high-quality names and the resilience of the market has benefited from clustering around popular structures as well as a greater understanding of how to deal with problem situations. Moreover, tighter spreads have made the sukuk market more competitive as more banks target the asset class. A further impetus to the regional markets has come from the continued improvement of conditions in Dubai and Bahrain, which have tended to be seen as the riskiest jurisdictions. In Dubai, the most challenging near-term refinancing/restructuring operations have been successfully dealt with," noted Kotilaine.
© Press Release 2012
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