Stock markets in the United Arab Emirates outperformed their Gulf rivals in October ahead of a major initial public offering (IPO), while Saudi Arabia declined despite investment reforms that were seen as investor-friendly.

Dubai’s index added 2.02 percent last month, while neighbouring Abu Dhabi gained 1.87 percent.

Drake & Scull International (DSI) was the most notable stock performer, surging 33 percent after the mechanical, electrical and plumbing (MEP) contractor announced in early October that it had completed a restructuring programme and received a 500 million UAE dirham ($136 million) cash injection from Abu Dhabi-based private equity firm Tabarak Investment.

DSI’s shares could make further gains, although the publication of its next financial results could spur traders to book some of their recent gains, said Marie Salem, director of capital markets at FFA Dubai.

In late October, Dubai bellwether Emaar Properties said it would sell a 20 percent stake in its property development business unit Emaar Development through an initial public offering (IPO) in November.

Emaar said in a subsequent statement that it expected the forthcoming IPO to be of similar size to that of Emaar Malls, which it spun off and listed on the Dubai Financial Market in 2014, raising $1.6 billion.

“New listings are always a positive trigger in the markets to boost trading,” added Salem, predicting Emaar Development could lead to a positive end to 2017 for the Dubai bourse.

Saudi reforms

Saudi Arabia’s index fell 4.79 percent in October after index compiler FTSE had decided to delay including Riyadh in its secondary emerging market index. Nine insurance brokers were ordered to stop business by the regulator, citing violations, which added to the gloom.

More positively, the kingdom unveiled several reforms and initiatives aimed at boosting investment during a lavish event in Riyadh dubbed “Davos in the Desert”. These include plans to build a $500 billion mega-city “NEOM” that will be floated on financial markets

“There were several references to ‘minimizing GDP leakage’, which occurs as Saudis with limited domestic investment opportunities send capital abroad,” Jean-Paul Pigat, head of research at Dubai’s Lighthouse Research, told Zawya by email.

“According to their estimates, Saudis spend $15 billion on tourism, $12.5 billion on health care, $5 billion on education, and $5 billion on general investments abroad annually. The creation of NEOM is meant to help slow some of that capital flight by creating new domestic investment opportunities, and strengthen the economy’s external position in the process.

“We see the creation of NEOM, and particularly the social reforms of this project, as being designed in large part to help foreign firms establish a more prominent domestic presence,” he added

The 26,500-square kilometre zone is slated to connect the kingdom with both Jordan and Egypt, and it will be wholly owned by Saudi’s sovereign wealth fund until it goes public.

Saudi Arabia last month also took two key decisions that it hopes will attract more foreign capital. The markets’ regulator said it would allow foreign investors to buy a 10 percent stake or more in listed companies; previously, 10 percent was the maximum holding permitted. 

In addition, the kingdom will allow foreign investors to have full access to NOMU, the secondary market for small and medium enterprises, starting from 1 January 2018; the regulator is also preparing new rules in conjunction with the Saudi Arabian General Investment Authority (SAGIA) to enable a further opening of the stock market, it said.

A Reuters poll of 13 leading fund managers conducted at the end of October showed participants are now more positive towards Saudi Arabia - 31 percent now expect to raise their allocations and 8 percent plan to reduce. Last month, 31 percent of funds managers foresaw cutting their allocations and 15 percent predicted they would raise their exposure.

Other regional, global markets

The Bahrain and Kuwait stock markets dropped 0.53 percent and 2.48 percent respectively in October, with upbeat global markets and an increase in oil prices having little impact on investment sentiment in the two Gulf countries. Brent crude gained around 6.5 percent last month.

© ZAWYA 2017