GCC stock markets are hitting record highs. Here’s why

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The GCC finished 2022 as one of the few bright spots in global initial public offering (IPO) markets. This trend has continued so far this year with companies in the region raising $3.4bn from 10 offerings in Q1 2023, according to the latest data from EY.

According to Kamco Invest’s projections in January, the pipeline for announced and rumoured public offerings could range between 27 and 39 companies throughout 2023. “Q1 2022 and Q1 2023 are by far the best performing quarters by IPO proceeds which the GCC has ever experienced up until now,” says Muhammad Hassan, capital markets leader at PwC Middle East.

There are a host of reasons why IPO markets in the region outperformed other geographies such as the relative resilience and immunity to global geopolitical events that drove passive index flows and index compiler weightings in favour of GCC stock exchanges.

Zahir Sabur, senior associate of Global Corporate at Reed Smith says the reforms being implemented in the UAE have had the desired effect of increasing not only the number of listings on both the Dubai Financial Markets (DFM) and Abu Dhabi Securities Exchange (ADX) but have also raised the markets’ international profile.

“The net result is that not only has liquidity improved and domestic institutions actively pursued IPOs, but a number of our international clients are now becoming increasingly interested in a dual-listing of their securities on a UAE exchange to complement their main listing on the New York Stock Exchange, London Stock Exchange or other international markets,” says Sabur.

The GCC’s weight in the MSCI Emerging Markets Index has also increased from 1.6 per cent in 2016 to 7.7 per cent in 2022, driven by several capital markets reforms such as IPOs, privatisation and increasing foreign ownership limits.

“There are many positives in the region that will continue to support investor confidence – Saudi Arabia is a key driving force with so much investment taking place, but we are also seeing encouraging signs of additional capital markets activity in other parts of the region,” says Gregory Hughes, EY MENA IPO and Transaction Diligence leader.

Overall, there are signs of growing optimism in the second half of the year and the number of companies that plan to list in 2023 reflects investor confidence in GCC stock markets.

GCC economies continue to be resilient to elevated macroeconomic risks as high oil prices, investor inflows and strong demand for share sales have resulted in an IPO boom. “While we expect the trajectory of interest rate hikes, geopolitical tensions and secondary stock market volatility and oil price volatility to continue to remain risks in 2023, it is worth noting that the prevalence of these factors did not stop strong IPO activity in 2022,” Kamco Invest stated in a report.

Success amid turbulence

The GCC’s stock markets have carried on strongly thus far with a significant amount of IPO activity against a background of diminishing activities in global capital markets to generate the second-highest H1 proceeds since 2015.

Industry experts say investors in the region consider shares of well-known companies, especially state-backed, as an excellent way to diversify their investments from real estate – a sector that is hugely subject to swings in demand and supply, and bank deposits that yield low returns.

ADNOC Group’s maritime logistics unit soared more than 50 per cent on its trading debut in Abu Dhabi earlier in June after its $769m IPO drew overwhelming investor demand, with $125bn in overall orders.

Sabur says certain listings on GCC markets appear to have been undervalued by the bookrunners and often IPOs have been oversubscribed, all of which point to real confidence in the markets.

ADNOC L&S listing is the latest in a string of IPOs that ADNOC has carried out over the years as state-backed entities are stepping up efforts to boost domestic equity markets while helping governments to diversify their economies away from reliance on oil revenues.

The energy group raised $2.5bn from the listing of its gas business, ADNOC Gas, in March. The deal stood out for the region with the highest proceeds globally for the first quarter of the year. Abu Dhabi is set to welcome eight more listings this year after ADNOC pulled off the world’s biggest listing so far in 2023.

Similarly, Al Ansari Financial Services’ offering on the DFM, the emirate’s first in 2023, demonstrated the continued appetite for GCC IPOs at a time when recession concerns, inflation and high-interest rates have damped investor sentiment in the global market. Al Ansari sold 750 million shares in the offering, equivalent to 10 per cent of the company’s paid-up capital, to raise $210m.

PwC also noted that the UAE market has been particularly active, accounting for over 90 per cent of the GCC IPO proceeds ($3bn) from two IPOs in the first quarter while Saudi Arabia dominated in terms of volume.

Saudi Arabia’s generic drugmaker Jamjoom Pharma raised $336m in May ahead of its trading debut in Riyadh in what is set to be the kingdom’s biggest IPO for the year. Another Saudi company, First Milling Company’s $266m IPO received bids worth SAR68.8bn from investors, about 69 times more than was available to them amid a boom in the kingdom’s share offerings.

Saudi Arabia’s Morabaha Financing Company also plans to raise $83.4m from the sale of a 30 per cent stake or 21.4 million shares via IPO. Meanwhile, the $244m IPO of Abraj Energy Services is the largest listing on the Muscat Stock Exchange (MSX) since 2010. PwC said the listing of Abraj Energy is a manifestation of the Oman Investment Authority’s initiatives that are aimed at encouraging IPO activities on the local exchange by privatising government investments.

“Whilst historically there may have been a view that the Gulf region was not a mature economic jurisdiction, the past few years of positive growth and returns on regionally-listed securities has led to more institutional money finding its way to the GCC,” adds Sabur.

The GCC will continue to generate interest for its strong, distinctive businesses and family office listings from international investors, given its competitive positioning and established reach in the market.

Driving growth

The Gulf region is experiencing a favourable climate for IPO issuances, and indications point to this trend continuing in the medium term, as the implementation of capital markets reforms stimulate listing activity are starting to yield results.

“The outlook remains positive for IPOs in the MENA region,” Hughes says, adding that there are multiple transactions that will likely convert in the next 12 to 24 months with listings in various geographies across sectors and of varying shapes and sizes.

Qatar’s $275m market-maker programme is the latest in a string of initiatives that are being implemented across the Gulf region to support private and state-owned entities on their path to IPO. The initiative will run over the next five years and the country’s wealth fund said it offers an economic incentive by way of a rebate to lower trading costs for established market makers.

Qatar Stock Exchange is working to increase listings and introduce more exchange-traded funds and derivatives as the stock market is preparing to welcome its first public offering in almost three years. The exchange missed out on a listing frenzy that made the GCC an IPO oasis in a desert of dried-up deals.

Saudi Exchange, ADX and DFM have unveiled an array of initiatives including flexibility on the minimum stake size required for share sales and promised to reduce or wave off listing fees in a bid to encourage more domestic listings.

“Generally, we have seen more appetite internationally for secondary listings to take place on either ADX or DFM, as opposed to markets in the rest of the GCC,” Sabur says, adding that with Saudi Arabia’s ambition for the Tadawul to be amongst the top exchanges in the world, they would anticipate further government-led promotion of the Saudi Exchange.

Abu Dhabi launched a $1.4bn IPO fund in October 2021 to incentivise private companies to list on the ADX. The IPO fund will be reportedly overseen by the Supreme Council for Financial and Economic Affairs, managed by the Abu Dhabi Department of Economic Development and it will invest in five to ten private companies per year.

The exchange also reduced trading commissions by 50 per cent and extended trading hours by one hour to enhance market liquidity and attract foreign investors. The Abu Dhabi bourse is expanding partnerships with other exchanges and increasing its institutional investor base through Tabadul Hub, a platform that currently counts Bahrain Bourse, Astana International Exchange and MSX among its members.

Dubai approved the establishment of a $545m market-maker fund in November 2021. The emirate also launched a Dhs1bn fund to encourage tech companies to list on DFM. The Dubai government listed five of the 10 committed government and state-owned companies in 2022. PwC said Dubai’s D33 Economic Agenda will likely lead to additional capital raising activities.

“We expect the privatisation of state-owned assets to continue – for instance, six of Dubai’s planned state-owned listings as announced in November 2021 are yet to take place,” adds Hassan.

Hassan also expects the recent IPOs of private businesses in the UAE and Saudi Arabia to accelerate the listing of non-state-owned entities and family businesses, driven by the recent high-profile events in the region, such as the Expo 2020 and the FIFA World Cup, which helped bring global investors’ attention to the region.

For the time being, the GCC pipeline looks positive with several companies announcing their intention to go public. Governments and private companies are also keen to sell equity while there is strong interest in the region.

Read: ADNOC Logistics gets $125bn in orders for $769m IPO