Arab Capital Markets Come of Age
Today’s Arab Middle East faces challenges like no other time in its recent history. The list includes issues pertaining to natural resource management, democratic practices, economic development (poverty, employment, and equal opportunity), and religious and cultural reformation. How such challenges are defined and managed will determine the future of this region for decades to come. How the Middle East’s challenges are managed will also impact its geographic neighbors and economic and political partners and allies. The choices are stark - political development and economic prosperity versus terrorism, migrations, and wars. The financial system of the Middle East is a critical part of the local economies. This financial system can be viewed as two parts: commercial banks, which take deposits and make loans, and are regulated by central banks; and, capital markets composed of issuers of securities, investors in said securities, and intermediaries. In more ways than one, capital market institutions and stakeholders in the Middle East are at the heart of addressing the region’s economic and political challenges. Well-functioning capital markets can play three important roles: 1. facilitate access to finance and growth capital for companies (including SMEs, which account for most of employment and GDP growth in the region); 2. provide mechanisms that enable citizens to store wealth; and, 3. create viable markets so that financial assets and securities can be bought and sold. Capital markets can also play an important role in enabling the average citizen to have a vested interest and stake in the economic development of their country, thus contributing to the peaceful political development of the region. The Middle East’s capital markets are by no means homogenous but that should not restrict an interested observer’s ability to view them synergistically through a common regional prism. From a capital markets perspective, the region is practically four sub-regions with varying degrees of development – the Gulf Cooperation Council countries, the Levant, and the Maghreb. Egypt is a sub-region in its own right. The region’s capital markets share common challenges and aspirations, and some of these include: • How to catalyze and maintain liquidity on the region’s exchanges? How to amalgamate and stitch together otherwise discreet liquidity pools across borders – both geographic and product-specific boundaries? • How to increase IPOs (family companies, state enterprises, SMEs) with sufficient free floats and market capitalizations to attract international investment funds? • How to rise up to international best practices when it comes to disclosure and corporate governance, particularly as these relate to related party transactions? • How to arrive at viable benchmark yield curves and catalyze the growth of secondary markets for corporate bonds? • How to spur the development of the insurance sector to facilitate the issuance of long dated securities? • How to convert stock markets into public shareholding companies and list their shares on their own, and other, platforms? How to arrive at regional and quasi regional stock markets? The vested interests in catalyzing further development and growth of the region’s capital markets transcend stakeholders within the region – • how can the Middle East’s capital markets become an engine of economic growth, utilizing financial resources from within the region and from outside, facilitating domestic investment, FDI, and international portfolio investment? • how can the region’s capital markets contribute to financing the development of needed infrastructure to support critical sectors – water, power (including green energy), education, transportation, and health? • how can the region’s capital markets contribute to employment generation at home, addressing migration pressures on host countries? • how can the region’s capital markets solidify their role in combating money laundering and terrorism finance? Over the past few years, the Middle East capital markets have undergone impressive developments. We have seen upgrades from frontiers to emerging markets, corporatization of stock markets, more inclusions of listed firms in international indices, a visible increase in IPOs and a trend towards listings on international exchanges, wider use of ETFs, and upgrades of legal and regulatory frameworks to international best practices. Local governments, bilateral and multilateral development organizations, and international financial institutions have all contributed to this, as well as the efforts of listed firms, shareholders, investors and intermediaries, and regulators. In addition to building on these successes, the next phase of this coming of age will also rely on the timely, reliable, and relevant delivery of data and information about the region’s capital markets, available to all stakeholders, local and international.
Jul 26, 2022 · 4 min read
In many Arab and muslim countries and communities worldwide, next week marks the beginning of the holy month of Ramadan. The idea that one may achieve spiritual elevation by giving up certain foods and drinks for a period of time is a common theme in various religions. Our bodies are bio-chemical entities whose equilibriums may be altered by depriving ourselves (abstaining) from certain ingredients and nourishments over a period of time. In this way, we move our bodies from one biological state of equilibrium to another. It is hoped that this process, this journey from one state of bio-chemical equilibrium to another, will induce a certain spiritual lucidity that will augment our innate tendencies towards the good that is inherent within us. As a religious ritual, this practice is referred to in different ways, the most common are fasting and lent. In several religions, fasting is considered an act of worship and is practiced during designated days, supplemented by other rituals, such as special prayers or meditations. Its culmination is typically marked by feast and celebration. As muslims begin the holy month of Ramadan this year, it is worth remembering that, at the end of the day, religions are tools for us to connect with the divine and realize the good that is within us. Religious rituals (e.g. prayer, fasting, pilgrimage) are not goals for their own sake; they are there to help embed a moral and ethical code in a people. For those who consider Him to be our ultimate moral adjudicator, God judges our character and humanity. We do not pray and fast to go to Heaven. We pray and fast to become good, and that is our path to Heaven. Religions came to us with unified sets of rituals and beliefs but we realise our individual states of grace in our own individual ways. Our spiritual needs, the culminations of the predicaments of our human existence, vary for each one of us, like the swings of a pendulum over time. Our spiritual needs dictate how much of religion we consume at the various stages of our lives. Indeed, those same religious rituals and traditions that one may wish not to engage in today could be of great relevance tomorrow. And vice versa. I am reminded of a muslim friend who eats pork and drinks alcohol yet fasts Ramadan and prays regularly. She considers herself to be a good muslim although in the eyes of some she may not be that, or at all. Diversity within a religion does not negate it; it is a sign of strength, not of weakness. The success of a religion does not come from solidifying a conservative core but in strengthening its capacity to embrace the many, especially those in the minority or on the margins. Ramadan is not meant to be a food orgy; a series of dinner parties lasting till dawn, with excess, waste, and lethargy as byproducts, as some in the Muslim World make it out to be. Ramadan is meant to teach humility; a moral and ethical value that is as old as humans have existed. In the The Sovereignty of Good , Iris Murdoch says that humility is a rare virtue and an unfashionable one. “Only rarely does one meet somebody in whom it positively shines, in whom one apprehends with amazement the absence of the anxious avaricious tentacles of the self.” Murdoch says that the humble man is not necessarily a good man but “... perhaps he is the kind of man who is most likely of all to become good.”
Mar 29, 2022 · 3 min read
The Muslim Feast of Sacrifice
Next week marks the days of the muslim Eid al-Adha, the feast of sacrifice, and many will be sacrificing livestock, mainly sheep, as alms to feed the poor. During Muhammad's times, 1500 years ago, one's wealth was measured by few yardsticks, one of which was how much livestock one owned. Back then in the Arabian Peninsula, livestock (camels, horses, sheep, cows, etc.) were a key element of one's wealth and it made sense to measure giving to the poor in terms of how many sheep or camels one donated to feed them. In this day and age, especially in our new COVID 19 world order, and the other diseases that are expected to afflict us with varying degrees of intensity, the less well off and the poor have different needs. It could be paying rent for a humble abode, buying medicine or clothes, paying a utility bill to keep warm and keep the lights on, meet a loan obligation or school tuition, or other essential needs - it is not always food, and if it is food it is certainly not always meat. We need to re-define what makes for an appropriate almsgiving during Eid al-Adha in our day and age. Perhaps it makes sense instead of sacrificing a sheep to donate the price of that sheep into a national fund that would, in turn, give financial support to the poor and the needy as their needs may be. Happy Eid...
Jul 5, 2022 · 2 min read
Who Is Afraid Of Equity Research Reports ?
The unfolding Adani – Hindenburg story is but the latest example of the role equity research plays in monitoring the behavior of publicly listed companies. And although courts of law in the relevant jurisdictions will be the ultimate adjudicators of what went wrong at Adani and who is to answer for these wrongs, the lessons should be clear. In times of irrational, or rational, exuberance (Alan Greenspan), some investors may not perform due diligence on target investee companies in accordance with international best practices. If those investors have fiduciary responsibilities towards their clients and fail to spot red flags, then they have to answer for those failures. A portfolio manager needs to ask two questions before committing funds to an investee target: Why should I invest in this company? And, why should I not invest in this company? Answers to these two questions are then risk weighted and a decision of “go” or “no-go” is arrived at. Risk weighting is in the eye of the beholder – we have different risk appetites and have different prisms through which we assess and price various risk elements. However, having a clear risk assessment process in place, and adhering to it, is part and parcel of fiduciary responsibility and proper due diligence. If the target investee company is so skilled at hiding liabilities, then that company’s management needs to answer to regulators and investors. And if a regulatory lapse (a failure to properly enforce securities laws and regulations) was the culprit, then regulators need to answer to courts of law, and to the politicians who appoint them. Companies that seek to list on public markets and collect monies from the average, relatively sophisticated or unsophisticated investor, are held to a different set of rules and requirements when it comes to disclosure and governance than privately held companies. In a way, that is the price a company pays when it chooses to list on a public market to raise capital and increase its value. If a company is not comfortable with such requirements, it should stay private and seek private equity investments instead. First and foremost, an equity research report is a tool to communicate the equity growth story of a listed company, in both qualitative and quantities terms. It benchmarks the company’s reality and future prospects against an increasingly standardized set of financial and sector filters and valuation metrics, as well as macroeconomic and monetary models. An equity research report may be commissioned by a listed company. Such a company may wish to market its shares with investment funds and an equity research report is a key communication piece that the listed firm uses as part of its investor outreach, along with press releases, investor calls and roadshows – all important Investor Relations (IR) tools. Typically, a company that commissions an equity research report will have the right to have the repot not published if it does not agree with its conclusions. Alternatively, an equity research report may be prepared by a brokerage house to share with clients, mostly investment funds, in the hope of increasing stock trading. Regulators insist on Chinese walls between research and trading at brokerage houses to avoid conflict of interest situations and protect investors. An equity research report may also be prepared by an independent equity research house, not affiliated with a listed company or a brokerage firm. The goal of an equity research report is to come up with a recommendation for investors: “buy”, “sell”, or “hold” a particular company’s shares. Such a recommendation is based on a certain valuation methodology that arrives at a future target price – as compared to the current price of a company’s shares: the future target maybe less, more, or equal to the current price, thus informing investor behavior. It is not uncommon to have more than one equity research report done on a particular listed company, with varying or contradictory recommendations and/or future target prices. It is up to the investor to read the reports available and make up their own mind. In the Middle East and North Africa region, around 1,500 stocks are listed on Arab stock markets, with a market capitalization exceeding $4 trillion by end of 2022. Many of these companies are investment targets for international investment funds, as well as regional retail and institutional investors. How many of these listed companies are being covered by equity research reports? One estimate puts the equity research coverage of MENA listed companies at around 20% of all listed firms in the region, with the majority of coverage focused on large GCC and Egyptian stocks. Two MENA brokerage firms are active in preparing equity research reports on MENA listed companies – EFG Hermes and Arqaam Capital. Additionally, a number of international prime brokers cover some listed equities in the region, on a selective basis. To my knowledge, there is only one independent equity research house in the Middle East North Africa region, and that is Tunis-based AlphaMENA. As MENA’s capital markets continue to develop, at different speeds of evolution, more equity research will be produced on the region’s listed companies. More and more companies will welcome and seek such analyses as they increasingly appreciate the role equity research plays in helping them reach out to investors globally to increase capital and market their shares. More and more local investors, be they retail or institutional, will increasingly demand equity research to support their investment decisions. This, undoubtedly, is good news for all. Disclosure: The writer represents AlphaMENA in Jordan and Iraq.
Feb 3, 2023 · 5 min read
MENA's Stock Markets – The Game is About to Start
For exchanges and trading venues, liquidity is the name of the game. The L word is what matters; it is the reason why companies seek out certain exchanges to list on, and it is why investors and intermediaries flock to exchanges. A virtuous cycle of sorts is at play. Higher liquidity levels lead to higher valuations of listed securities. This, in turn, attracts more listings, which attract more investors and intermediaries, fueling even higher liquidity levels. A traditionally stratified sector, the exchange world has gone through seismic changes over the past couple of decades. The amalgamation of otherwise discrete liquidity pools across geographic and product boundaries saw the creation of international liquidity streams. Nasdaq Group, Euronext, ICE / NYSE, and the more recent Swiss-Spanish exchange merger are examples of successes. Deutsche Börse’s attempts at expanding its liquidity pool via mergers and acquisitions, and the repeated interests in the London Stock Exchange by several suitors are examples of efforts that did not go far. Liquidity consolidation will continue to be the modus operandi of exchanges for the foreseeable future. This is not only because of the virtuous cycle referred to above but also because revenues generated by exchanges from the sale of information and information-related services are growing by leaps and bounds. For some stock markets, these revenue streams have eclipsed those generated by cash equities trading. And what better source of raw information and data that can be packaged into multiple products and sold to end users than a trading space – the more trading in more financial securities and products across multiple geographies, the more information generated. In many countries, particularly developed economies, stock markets have corporatized, becoming shareholding companies listing their shares on their own, and other platforms. This development has been a major facilitator of liquidity consolidation, realized through exchange mergers, acquisitions, and cross shareholdings. For other countries and stock markets that have not gone through this transformation fully yet, such as those in the MENA region, the question is: what awaits? In other words, given that liquidity consolidation is the current operating business model for stock markets and trading venues worldwide, what future strategies will MENA exchanges pursue to better serve their listed companies, investors, financial service providers and, ultimately their economies? To answer this question, one is tempted to first view the capital market landscape in the MENA region. Although geographically contiguous, when it comes to the level of capital market development, MENA can be viewed as a collection of sub-regions. The Gulf Cooperation Council (GCC) countries and Egypt are the more advanced. In the Levant, Jordan and Palestine stand out. In North Africa, Morocco is ahead. Hence, one may assume that these varying levels of capital market development translate into multiple strategies to be pursued by the region’s exchanges. But that is not the case. The current operating business model of exchanges worldwide means that each MENA stock market will have to choose one of two strategies: Node or Niche. Node or Niche will be the only choices for many exchanges in frontier and emerging markets, including those in MENA. As worldwide liquidity continues to gravitate towards fewer global streams, an exchange operating in a developing country will have to choose. It can function as a liquidity node, aggregating liquidity within its region and connecting the resultant regional liquidity pool to international liquidity streams, benefiting listed companies, investors and intermediaries. Or, it can specialize in terms of services and product offerings – the niche approach. The decision of individual MENA exchanges to go for either a Node or Niche strategy will be influenced by multiple factors. One of those factors is the presence of international exchanges in the region. Three global exchanges are currently present in MENA in different ways. The London Stock Exchange has a strategic relationship with Morocco. Dubai owns a substantial minority position in Nasdaq Group. And several countries are using Euronext’s trading system, as well as Nasdaq’s. These relationships are bound to inform, with varying degrees of intensity, future strategies of MENA stock markets. A key question is whether ties to the big boys will connect the region’s liquidity pools to international liquidity streams – the liquidity node strategy. The need for MENA companies to list on liquid exchanges is another factor influencing strategies of local exchanges. MENA companies are moving from being successful local operations to becoming regionally competitive enterprises with, at times substantial tranches of international activities as part of their portfolios. In doing so, they have gained added appreciation of the role that equity plays in their capital structures. Investors and shareholders are also realizing that for the Middle East to evolve into an internationally competitive region with successful industry clusters, companies in the region need to expand their equity bases. Raising seed and venture capital, seeking private equity injections for turnaround and growth, and going public and listing on liquid exchanges are becoming common practices in a region that has traditionally relied on debt. Some exchanges in MENA may choose a Node Strategy, specializing in certain products and services. Nasdaq Dubai has established itself as the listing venue of choice for Islamic sukuks. Abu Dhabi has been actively seeking to lead the listing and trading of exchange traded funds (ETFs) in the region. Casablanca may function as a platform to access certain African capital markets. Given that Jordan has one of the largest reserves of phosphate in the world, the Amman Stock Exchange has a golden opportunity to launch an internationally traded phosphate contract in partnership with an international commodities or derivatives exchange. As MENA exchanges come of age, they will look for new and better ways to serve stakeholders. Cross border investing is foreshadowing the creation of regional heroes in multiple sectors. The compression of dispersed regional economic interests into single corporate entities with regional and international mandates and aspirations is putting pressure on MENA exchanges to respond. Instead of a race to the bottom, MENA stock markets will soon start on a different kind of competition to gather regional liquidity, and listings. The international alliances and liquidity linkages that MENA exchanges will develop will provide another way in which the region is becoming inexorably linked to the rest of the world; something that is of immense benefit to companies, investors and intermediaries, and an exciting development that will usher in new opportunities and challenges.
Mar 22, 2022 · 6 min read