The passing of the Capital Market Law (CML) recently by the Kuwait parliament is a momentous decision and may mark a significant turning point in the capital market fortunes of Kuwait, Kuwait Financial Centre (Markaz) said in its report. Given the current global and regional market turmoil and the huge losses being suffered by local investors, there is a general lack of appreciation or enthusiasm about this key development, Markaz analysts M.R. Raghu and Layla Al-Ammar said. Barring Saudi Arabia, there is not much empirical evidence in the regional context to estimate the huge leap that this step is likely to bring. Apart from the usual benefits of improved systems, investor protection and transparency that the CML is supposed to herald, it is likely to bring in strong foreign investment interest especially at a time when Kuwait is positioning itself to become a financial hub and foreign investment in Kuwait stocks is generously allowed, they said. The learning and experience of Saudi Arabia will be key to this assessment since much of the Kuwait CML provisions mirror that of Saudi Arabia. The Saudi CML was put into effect toward end of 2003. At a broad level, the total number of companies listed increased from 73 (2004) to 136 (2009), a near 90 percent jump. Liquidity (as measured by average daily value traded) jumped from a modest $0.16 million (2004) to $1.3 million (2009). More importantly, Saudi companies today are more prompt in disclosing their quarterly performance than before. As of the day of writing this, 96 percent of Saudi companies have declared financial results for 2009 as against 20 percent for Kuwait. The stock exchange experienced a qualitative jump in terms of stocks that dominate trading. Prior to the CML era, it was not uncommon to find penny stocks (notably agriculture sector) dominating trading. Additionally, the IPO market, which often enjoys frenzied following among locals, got a fillip in terms of number and size of issues. Public offerings (including private placement) swelled from $5.5 billion in 2006 to $19 billion in 2009. The case study of Saudi Arabia is thus a very interesting pointer for the shape of things to come in Kuwait. Not that such result will just repeat especially in areas like number of stocks listed where Kuwait faces an abundance problem with more than 200 stocks listed. Much of it (85 percent) is small and micro caps with negligible trading and belongs to distressed segment of financial and real estate companies. However, the new CMA may offer a good solution in terms of altering for good that market structure through privatization opportunities and facilitating the process of consolidation. This would then hopefully improve the composition of stocks that dominate trading volume. During 2009, the top 5 traded stocks (volume terms) on the Kuwait Stock Exchange enjoyed a cumulative market cap of just 1 percent of the total market capitalization as against 25 percent for Saudi Arabia. Implementing the CMA in Kuwait can be expected to bring similar transition to quality as was observed for Saudi Arabia. Much of the debate from here would tend to center on the composition of the board of CMA and the speed with which the authority is set up into action. It will be resource intensive in terms of manpower (the Saudi CMA employs nearly 500 staff) and hence may call for extensive planning and execution finesse. If not marketed properly, the local trading community may view this more as a policing exercise than a genuine progress towards regulatory reforms.
