Kuwait Capital Market 2012: CMA, Outlook, Equities, Bonds

How widespread is the trade within Kuwait?

Rumors will go around because of the small size of the community. People talk with each other. Some things happen, others don’t. Sometimes people speculate. But I cannot say whether there is inside trade in Kuwait or not. That depends on the size of the company, how restricted they are in their procedures, how they protect their name and their quality of service.

In 2011, the government set up the Kuwait’s first capital market. Where does that capital market stand at present in terms of depth and sophistication? What do you expect will come out of this capital market?

To be honest, the capital market in Kuwait is much better than before.The reason why is that people need to be more structured, especially concerning the trade and the market. The market, too, needs to be structured in a way that should abide by the most recent rules and regulations. The Capital Markets Authority is coming in very difficult times; it is late to be implemented after the crisis. The difficulty that they are facing is the time.

The other problem is that people need to learn about those rules and regulations, which they have never heard of before. It is a small market; it does not apply with all of the international rules and regulations of transparency, inside market, and how the law is there to ensure that people get used to some of the legal practices without being punished. That takes time. However, yes, I do think that the Capital Markets Authority is very important – essential – for any capital market in the world.

To be honest, the stock market in Kuwait needs to have such regulations to gain the trust of foreign investors who are considering coming to the country. The market in Kuwait is not regulated at the moment, at least not without the Capital Markets Authority regulations, therefore people are reluctant. Sometimes you trade stocks on the market but receive no confirmation about it. Also, there is no thorough check on the activity of the company, its intentions are not always clear… But the traders have the right to know all that.

What is the outlook for 2012? How is the Kuwait equity going to perform during 2012? According to you, which of the sectors will be the winners and the losers?

Truthfully, 2012 will not be much better than 2011, in particular the index of the stock market, which is 50% below – not only in Kuwait, but in the whole region. In 2007, the index was much too inflated, because of the lack of regulation that I mentioned before. So I think that today, most companies are in such a position, which I think is best for the time, compared to their performance. Having said this, it doesn’t mean that there is no stock below its value, but I think that most stocks’ value reflects their true performance and their results for the time being.

If you ask me which sector is going to improve compared to others, I would say the banking sector, and also the retail industry and the services. The thing is, everything is related to the government’s expenditures, and whether it starts spending for that particular area of services.

During the crisis, for the whole world – not just this region or Kuwait –, the investment sector was badly wounded. One of the main issues was trust. To gain that trust, more time is needed.

As for the banking sector, people will not stop dealing with them, no matter what happens. One needs the banks for one’s salary, business, insurance – anything and everything. The banks are the link between everybody, regardless of whether there is a financial crisis or not. Still, during the crisis, the banks were hit by taking provisions. But the reverse process can happen now. The people who have surplus money can deposit that money at the bank and provide it for use.

We have to regain the trust of investors by being very straightforward about the way we do business, by proving to them that we offer premium quality service, by offering them the track record of that which we have already produced and by telling them how it’s being affected by the market index, as compared to any other indexes that we are doing business in. That is especially true if we are doing this in a region like Saudi, for instance; it affects the position we are taking for those clients and the correction is much less than the index. That shows how professional we are.

But correction can happen to any investor, especially when the financial crisis hits. You cannot do different from others. As you said, the correction is of 50%, so how can I outperform the others? That takes them. People tend to go to the fixed, secure products. It takes time to go back and convince people that this is life; it is not always glory and success without any problems.

What will continue to be the challenge for the sector? High debt or equity ratios, perhaps?

Let me talk about us and use KAMCO as an example, as we are part of that sector. I said this last time, too. Two years ago, I was saying those things, I had a feeling, and now, it has become reality. Investment banking has to focus on its core business only. Before, we took part in other activities, but times have changed and opportunities are limited, so it is better to focus on the core business – your main goal, what the business was established for in the first place.

I can see a lot of leveraging from some investment companies that have more than one business line, and in turn, more people to do it. If they are leveraging, it means that they are going to exit from direct investment, for instance, which is not directly related to their business, but still a good business to take part in. Also, to position yourself, you would gain the trust of most of your investors and help companies that are facing problems, which is part of the job.

KAMCO’s stock price is down almost 70% from the heights in March 2008. It is trading in a range of 250s. Also, total revenue in 2010 was the lowest since 2006 at 10.4 and net profit reached 1,8, which is the second worst performance since 2006. Despite the negatives KAMCO recorded the growth in customer deposits. How are you going to improve your stock price, revenues and profits in 2012?

Let me go back to what I said before. In 2007, the market was at its peak and most stock prices were extremely inflated; KAMCO was among the companies that were affected. At that time, the prices did not reflect the real, fair value of the stock and the company. It was two and a half times too high. That was quite unusual, but due to the fact that the market was unregulated. People thought that those prices were too good to be true. They were merely speculating without thinking about what might happen in the future. That is one of the reasons that explain the gap between values.

Today, the prices reflect the real position of the companies, in terms of earnings, profits, etc. Speculation makes prices fluctuate, but performance does too. We were affected like others, but we stood against the waves and tried to reform ourselves, be patient, wait until the crisis was over. Unfortunately, its effects have not gone completely. There is still work to do. Maybe by 2015, the situation will be back to normal, but at least, we are going in the right direction.

Can you elaborate a little on your investment strategy for 2012? Where are you going to cut? Or would you like to have more scope?

As I said, the strategy is to focus on asset management. Our chairman stated that we are looking for new opportunities and funds from other countries, particularly in Asia, like China. We have been studying those markets and believe that we need to be at the position of those companies. Also, the GDP in those places has grown, so we are going in the right direction in terms of investment.

On the other hand, we would like to deleverage from other sectors, like real estate, industrial. As I said, we want to focus on our core business – which in our case is asset management, investment banking – as well as to gain the trust of our investors, to show them that our products were very well studied and supervised by truly competent and high-quality experts. As you can see, it has migrated from the West to the East. We need to be in the places where the growth happens.

Clients have suffered from the crisis and now they have no sources to go to. If they go to the bank and deposit, they will earn a meagre 1%, which is quite negligible. At the same time, they are reluctant to go to the market considering the situation. We need to be able to offer them something that has thoroughly been studied. The reason why we chose this area is because we believe that there is growth there, and it is an opportunity for them to invest.

Do you think there is a potential for growth in traditional markets like the United States and Europe?

Yes, of course. There are good opportunities in those markets. However, I think it is best to focus on certain areas and see where the real business is. Actually, none of us believe that the crisis is truly over and done with in those countries. It might very well still be going on in the United States, and that country’s market is directly linked with the European market. So this is why we think it preferable and safer to focus on one area, namely Asia, in our case.

There is, as I mentioned before, the issue of trust. People need to keep their cash very close, so they can live with peace of mind. But they must not go unless they are sure of what they are doing. Of course, there is always a possibility of buying gold, but its price is shooting up, so nothing is for sure. Nowadays, things have stabilized, so the price of gold is sure to have a big correction. At the end of the day, no matter where you go, there is a risk that you have to mitigate.

We must avoid all cash disasters. Right now, the value of the currencies is deteriorating. Take any one of them: the euro, American and Canadian dollars… Definitely, cash is not the solution. Still, at the same time, cash is king as they say. Cash is something liquid you can move easily and use however you want when an opportunity comes up. As for goods like gold, it isn’t easy to liquidate them and get your money back. Even government bonds are not as secure as they used to be.

Lastly, you spoke about the Sukuk as an example of your success.

It is not Sukuk, but actually a bond market. To be honest, we focus more on the fixed income products and one of those is a bond. Now, with the Capital Markets Authority regulation, this bond market is being more regulated than it used to be. They are thoroughly going through the prospectors of the company that you are establishing, to make sure that they are financially strong and that you know where you are going with them. Also, the cash flow is healthy, so you can pay back the investors or the lenders.

Those are all the limits of insurance for the people to take those kinds of products while feeling secure about them, because there are regulators focusing on them and doing the necessary checks. Before, it was not like that. The process was very fast. You gathered the prospectors, went to the ministry, were provided the information very quickly and instructed to go ahead with the product.

The equity market is a seed for any market, but you must be selective. You need to focus on one or some sectors that you feel has more growth potential than the others. We are currently in the process of issuing another bond for another company… Hopefully, by the next month, it will be in the market, and we will continue to do that which we think is an effective strategy for us.