It has been announced that there is some changes that are going to occur at the Kuwait Stock Exchange. The KSE will change the categories to which stocks belong to. The new categories (or Sectors) include: Oil and Gas, Basic Materials, Consumer Goods, Healthcare, Consumer Services, Telecom, Banks, Insurance, Real Estate, Financial Services, and Technology.  The move seems reasonable as the new categories will be more specialized rather than having a generic “Services” category. However, I think it will be difficult to fill some of these categories, such as Technology, Healthcare, and Basic Materials.

Also, a new index will be added, named “Kuwait 15″, which includes 15 of the biggest companies listed on the KSE, based on both market value and volumes. The index is to be adjusted semi-annually. I think the new index would be a better indicator of the overall market as many companies in the current benchmark are not traded frequently, distorting the returns of the benchmark.

Below is the what companies the Kuwait 15 will probably include:

National Industries and Gulf Cable are ranked 16th and 17th in terms of size, but are very close to Agility (15th).

By: Rafique Suleman

Trading at KSE is executed by computerized system, called Kuwait Automated Trading System (KATS). The system is thought to be efficient, confidential and fair among traders. Authorized brokers have equal access to the KATS Server, via a KATS workstation in their offices at KSE and necessary information of trading is readily available there. Brokers directly enter orders into its KATS workstation. Investors can place buy/sale orders only through a broker. So far, it is good; however, the issue of the anxiety is how the unfilled long terms orders of a day are treated at KATS and Broker’s System.

Based on the information received from my broker, for a share the long term orders that were received in KATS but could not be filled during a day and its queue, lapse at the end of trading time of the day. Therefore, unfilled long term orders are required to be placed next trading day again in KATS by the broker. Queue of orders for a share is reset, based on the principle of first come first served. As an investor has full option to cancel a order at any time, why the queue should be reset and deprive an investor who has placed a long term order. In other words why cannot the order validity in a broker’s system be transferred in KATS system and maintained as it is till the order is filled or the investor cancels the order.

Broker’s System

Other than the issue of lapse of an unfilled order at the end of trading time, there might be relevant issues at a Broker’s system, as described below. In a broker’s accepted orders for a period of more than a day for a share, for the unfilled quantities, how efficiently a broker’s system places client’s orders the next trading day in KATS prior to start of the trading is an issue that needs attention.

Secondly, if there are unfilled orders of multiple clients for a specific share, the concern is there whether the queue among the clients within broker’s system remains as it was the earlier trading day or there are possibilities of manipulation of the queue. Those, in this form, having direct experience with KATS or trading system of a broker my add more information and/or correct the errors in the information presented herewith on the subject.

On March 13th, Kuwait’s Capital Market Authority (CMA) bylaws were published in Alkuwait Alyoum official government newspaper. This  action constituted the official declaration that the CMA bylaws are now in effect. Further, the CMA reminded of this in a statement posted on the Kuwait Stock Exchange (KSE) website today. Although most laws are in effect as of last Sunday, the law provides a time frame of between 6 – 12 months for the KSE, brokerages companies, and investment companies to fully comply. For example, according to the bylaws of the CMA, the KSE will have to transform into a private company equally owned by listed companies through an auction and Kuwaiti citizens through a free public offering. This process must be completed in the next 12 months.

All other laws, such as those pertaining to takeovers, are currently fully in effect. This deals a major blow to Zain, which can’t see its deal going thru anymore as new regulations force an acquirer of a stake of more than 35% to extend its offer to all other shareholders. The first takeover transaction compliant with CMA laws could be Injazat Real Estate’s takeover of Aqar Real Estate. The disclosures and other requirements for this deal will provide us with a valuable insight into the effectiveness of the CMA.

Congratulations to all Kuwaitis on this massive step that will hopefully instill more confidence in the KSE. We finally have an authority that will safeguard our stock market from major manipulations and the lack of transparency. According to Al-Qabas daily newspaper, investment companies committed 544 breaches to Central Bank regulations from 2004 to 2010. Most of those breaches faced minimal punishments. We hope this step will usher a new era of fairness, ethics, accountability, and transparency in Kuwait’s financial community.

News is circulating that the Kuwait SE will roll its new index five months ahead of its scheduled November 2011 debut. This would be great news if confirmed. As stated in an earlier post, the new index will consist of 15 blue-chip companies, in collaboration with NASDAQ. Those will be “carefully” chosen from across all sectors of the exchange and will be placed on a bi-annual review to aid in updating the constituents of the index. The move will be a vital one because the current main index is price-weighted and fails to provide a relaible reading.

Below are links to previous articles related to the issues with the current price index:

http://www.alphadinar.com/2011/01/11/kuwait-ses-2011-reforms-start-with-the-index/

http://www.alphadinar.com/2010/12/29/difference-in-weights-of-the-price-and-weighted-kuwait-se-indices/http://www.alphadinar.com/2010/12/14/kuwait-se-weighted-index-should-be-the-main-index/http://www.alphadinar.com/2009/08/05/price-weighted-index-vs-market-weighted-index/

The graph above shows the weights of the different companies listed on the Kuwait Stock Exchange and their weights within the two indices and the difference in weights. (Click on the graph for a better view)

This table shows the top 10 companies that are under/over represented in the Price Index. We find that the biggest companies listed on the Kuwait Stock Exchange are under represented, including Zain, Agility, NBK, KFH, and other banks. The stocks that are over represented are ones that have a high price, but their size is not as big as other companies. Gulf Insurance has a stock price of 600 fils and a market cap of KD 101.8 million, which is substantially lower than Zain’s KD 5.8 billion market cap.

The following is a table of the weights of listed Kuwait companies in both the Price and Weighted Indicies:

Over a year ago, Saud wrote a very informative post explaining the differences between a weighted index and a price index.  A weighted index places value on shares based on their respective  market capitilizations relative to the overall market capitalization of the the stock market. For example, Zain (KD 1.460 ) would have a bigger weight in the index and affects it more than Wataniya Telecom (KD 1.860). Why? Because Zain’s market capitalization stands at KD 5.7 billion vs Wataniya’s market capitalization of KD 0.9 billion. Do you know what a price index would do? It would simplistically place more value on the higher priced share. Although Zain is 6 times bigger than Wataniya, Wataniya would affect a price index more than Zain!

Yesterday something unacceptable occurred at the Kuwait SE as Tas’heelat, which is a small company that last traded a month ago, fell more than 50% yesterday from 345 fils to 160 fils. Blue chips in the Kuwait SE were trading up and the weighted index continued to reflect a positive bias even after the massive decline in Tas’heelat’s share price because the company’s market capitalization is minuscule. However, the price index instantly declined and closed down for the day. Talk about wrong signals and a failed index!

Most developed nations adopt a weighted index and the Kuwait SE must do the same for the aforementioned reasons. Some people may argue that the famous Dow Jones Industrial Index is an example of a price index that works well in the U.S., however, one has to realize that the reason it works is because it is comprised of only the 30 largest companies in the US. It doesn’t include any small companies! The Kuwait SE has to adopt the weighted index as its main index because it is very reliable, more representative of the market, and is adopted by most developed markets.

Of the 227 listed companies in the Kuwait Stock Exchange, 94 are currently trading at/below their 100 fils PAR value! This translates into a whopping 40% of all companies. Something is deemed to be done. I believe the Central Bank of Kuwait should run stress-tests on all companies. Depending on the results, companies should either recapitalize or get “the boot.”

In addition to all this “fungus” (Al-Qabas articulately uses this term!) created by the ailing companies, we have not much to offer. The banks have no projects to finance and no real worthy private sector to extend credit to. Their exposure to prone-to-fail companies and a real-estate bubble are alarming. As far as operational companies, the ”beautiful world” of Zain was sold and so was the company’s future expansion. Doesn’t that remind you of another company? Does Wataniya Telecom ring a bell? Many investors were hoping Agility would be the light at the end of the tunnel, but the US government’s contract dispute crippled the company. What’s left? Nothing much. A bunch of derivative plays on the Kuwait Stock Exchange heavyweight companies. What happens to derivative plays when the underlying collapses? They explode.

Nevertheless, there is still hope that we, the next generation, will force change.

Proponents of the “invisible hand” theory coined by Adam Smith will respond with a screaming “Yes” to the notion that the market issues will eventually resolve themselves. I was reading Al-Qabas daily today when I stumbled upon another proponent of the invisible hand theory; It isn’t Milton Friedman, but our Deputy Prime Minister for Financial Affairs. He too proposes that the Kuwait Stock Exchange cleanse itself. I personally oppose such a stance not only because my nickname is Keynesian and I advocate a more prominent government role especially in a market failure situation, but also because I believe our stock market doesn’t have the necessary structural elements to cleanse itself. For example, there are no bankruptcy laws and we don’t have a Capital Market Authority yet.

Where do you guys stand?

Yesterday the Kuwait SE price index reached its five year low of 6,328 points, closing lower than the January ’09 levels of 6,380 points. However, the weighted index was much more merciful as it is still above its one year low of 373 points. This is a classic example that shows how our price index is not a good indicator of our economy as most of the large caps didn’t fall as much and did not have the same fate as some of the small caps.

Below is a chart of the price and weighted index.

Zain, the largest compay in market capitalization, has been halted from trading on Sunday following their AGM on Thursday. Trading in the KSE has decreased significantly and reached its lowest levels since the begining of the crisis. Previously I did an anlysis on how will the market be affected if Zain was suspended from trading (click here) and the result of the analysis was that the market as whole will be affected and there will be a sharp decline in value traded. Today I did a similar analysis,where I showed the share of Zain’s value traded out of the value traded of the KSE. We will continue to see low volumes until Zain resumes trading, maybe then we will see some recovery in the market.

*The chart below shows the value traded in the KSE since Jan ‘09

* The bar chart below shows how much Zain contributed in the monthly traded value of the whole market.

* This pie chart shows Zain’s value traded contribution to the whole market from year-to-date.