If 2009 was the ‘Year of Hope,’ then 2010 will be remembered as the rather less pithy, ‘Year of Continued Recovery.’
Investors across the globe were seen eagerly reading and reacting to the various economic swings in various financial hubs while hoping that governments would properly prepare to tackle the many issues highlighted by the credit crisis.
Hopes of improving trade in terms of surging exports from emerging economies, better earning realisation by global companies and a continued pattern of new job creation has allayed fears of a global double-dip recession as the world economy experienced recovery in 2010.
However, the world is not immune to the plague of financial crisis, as each economic zone has faced inter-related economic problems. The western markets from the US to Europe have been focused on housing, debt and unemployment issues; in Asia, there has been concern around the massive influx of foreign institutional investors into the markets, pushing many of them up to new post-crisis highs. However, the quick market surge imported accelerating asset prices – causing a new potential real estate bubble and burgeoning inflation.
The Middle East was also affected by the depressed state of real estate prices: over-supply of commercial property, debt-restructuring by investment companies and cheering oil prices in the context of a weak dollar remained the year’s key concerns.
The Kuwait Stock Exchange in 2010
The Kuwaiti market witnessed quick-fire sessions and its weighted index cruised successfully on a critical level of 400 during the early part of 2010. The surge was largely driven by stable oil prices, better corporate announcements and the success of the valuable Kuwaiti-Corporate deal of selling the African assets of Kuwaiti telecommunications company Zain to the Indian firm Bharti Airtel. However, during Q210, the euro debt crisis emerged in Greece, prompting fears of possible debt defaults by the eurozone and taking its toll on the regional markets as well as the Kuwait market.
Battered by European debt uncertainties and a liquidity flight, the GCC markets were further shaken by looming concerns over proper debt restructuring procedure by local companies and adverse ratings by S&P and Moody’s on local Kuwaiti banks.
However, the Kuwait market reversed its direction in July, mainly sourced through better corporate earnings for H1 2010 and positive economic news – especially the government’s decision to invest KWD30bn in a new mega-infrastructure plan. This came as a major relief to the market and particularly to the banks, which learned that they would be funding the development.
Other positive business news that boosted investor confidence included rumours of an Emirati investor expressing an interest in a stake of National Bank of Kuwait, the country’s largest bank; recovery in property sales; the purchase of 39.2 percent of Gulf Insurance Co to Canadian company Fairfax Financials Holding; and Emirati telecom giant Etisalat offering $10.5bn for a 46 percent stake in Zain.
Steered by all these positive developments, the market recouped its earlier losses and the index peaked at 487.25 on December 27. The weighted index finished the year with impressive gains of 25.51 percent, making it the top performer in the GCC.
However, the KSE Price Index, the exchange’s main index, ended the year almost flat, losing 0.71 percent of its previous year closing due to weak performance of small and mid cap stocks. Meanwhile the Islamic Index (the Muthanna Kuwait Total Return Weighted Islamic Index, or MUDX) outperformed its conventional partner, witnessing a smart growth of 7.75 percent to close at 637.99 – a decent gain of 45.86 points over 2009.
Sector-wise, the banking sector topped the performers list, finishing the year at 11,893.50 – 3,547 points (42.5 percent) over 2009. Conversely the real estate sector continued to face discrimination and lost confidence from investors, ending the year down 436.5 points (15.63 percent) at 2,355.70. Islamic sectors followed the same trends as the conventional market, with just three sectors ending the year with positive growth.
Market capitalisation
A downtrend in market capitalisation was finally reversed after two years of decline, primarily due to strong performance of large market cap stocks as reflected through the performance of the KSE Weighted Index. But despite solid gains and new listings, the market is still 36.82 percent below its 2007 peak of KWD 57.59bn. The gain in market cap was largely driven by the banking and services sectors, which grew by 45.5 percent and 27.4 percent respectively during 2010.
Kuwaiti Economy
Kuwait’s key income stream – oil – enjoyed an uptrend from March 2009 and ended the year at $80/bbl, forcing economic houses to reassess their growth forecasts for Kuwait and other oil exporting countries. This trend continued through 2010, and the per-barrel price breached the significant psychological level of $90 by December – a boon for the real GDP growth of small but oil-rich Kuwait. The IMF projected Kuwait would post 2.3 percent GDP growth for 2010, but it is likely to grow by around 3.5 percent due to the higher oil prices (oil contributes 94.5 percent of total exports and around 60 percent of GDP) for FY2010.
Despite the healthy economic outlook, Kuwait needs to work hard to develop its non-oil sectors if it is to sustain economic growth. Its dependence on the energy sector means that any significant global developments will have a deep impact on the region’s economy. The recent World Energy Outlook summarises how emerging markets are exerting tremendous efforts to pursue green energy instead of relying on oil. Moreover, the outlook for 2011 also depends on the status of Europe, the GCC region’s biggest trading partner. The weakening US Dollar (due to mounting debt and quantitative easing) also carries significant risk to local currency’s purchasing power and this may put further pressure on the Central Bank to use existing reserves, in a bid to keep away fluctuations in currency exchange regime.
Economic lifeline
Fluctuations in the Kuwaiti stock exchange – and indeed in markets throughout the GCC – tend to follow the variations in the price of oil. Saying so, Oil can be termed as “lifeline” of the Kuwaiti economy, which performed better than expectations, in 2010. The commodity moved into a higher range of $80 by Q110, but the eurozone debt crisis restricted oil rising further and brought the level price down to $64.75 in May.
However, healthy GDP numbers from the emerging economies and strong manufacturing data from China, a major crude oil importer aided the product to traverse a level of $90 later during December 2010.
By the end of 2010 oil had clocked a robust gain of 202 percent from its all-time nadir ($30.28 in December 2008) – but was still around 37 percent lower than its historic peak (at $145.31), in the height of the financial crisis. From an angle of pure commodity investment this gap leaves the door wide open for further gains because most of the compared assets in equities – emerging markets – have either hit their multi-year peaks or about to do so.
2011 outlook
Going forward, 2011 carries a mixed bag of hopes and fears amid an array of continental developments. As the economic situation worldwide continues to improve, oil demand will rise – especially in emerging markets, which are expected to contribute 75 percent of total global economic growth in 2011.
Surging oil prices will contribute a surplus to Kuwait’s trading account, driving its economy to register healthy growth for the second consecutive year. And in such a favourable scenario, we expect the government to divert the oil-dollar windfall towards infrastructure projects, as approved under the first Five-Year Development Plan (and its successor, announced this year) – thus diversifying away from oil and safeguarding a sustainable future.
Shoyeb Ali is VP of the Investment Research Department at Muthanna Investment Co.
