Monday, September 13, 2010

Insights into the GCC Markets from Markaz’s “Golden Portfolio” Report


In April 2008, Markaz issued its first report on the "Golden Portfolio" – the various stocks held by GCC government owned enterprises ("GOEs"). On 7 September it updated its analysis with data as of 5 July 2010.

The report tracks the holdings of 51 GCC GOEs in GCC stock markets.

The following two charts summarize the macro snapshot (original chart on page 2 of September 2010 report).

First, the number of companies in which investments are held.



COUNTRY
NUMBER

OF GOEs
NUMBER OF

COMPANIES HELD
TOTAL NUMBER

OF COMPANIES


PERCENT
Saudi Arabia104714033.6%
UAE102911026.4%
Qatar8184540.0%
Kuwait104219421.6%
Bahrain9204445.5%
Oman142312718.1%
TOTAL5117966027.1%

Second, the value held expressed in US$ billions.



COUNTRY
VALUE OF GOE
INVESTMENTS
TOTAL VALUE

OF MARKET
PERCENT
Saudi Arabia$109.7$314.635%
UAE$ 28.3$ 97.229%
Qatar$ 26.0$ 97.727%
Kuwait$ 11.7$ 90.913%
Bahrain$ 3.5$ 16.421%
Oman$ 2.7$ 16.716%
TOTAL$182.0$633.529%

This data gives an idea of the relative government presence in local markets. It also shows the relative sizes of markets.

But if you drill deeper into the information on the country tables, what you learn is that: 
  1. In Saudi Arabia, 5 companies held by GOEs account for 38% of total market cap. One company SABIC over 21%. 
  2. In the UAE, 5 companies held by GOEs for roughly 42% of market cap. One company, Etisalat, almost 23%. 
  3. In Qatar, 7 companies held by GOEs for 47% of market cap. One company, Industries Qatar, for 15%. Another Qatar National Bank for another 15%. 
  4. In Kuwait, 8 companies for almost 44%. (If you're wondering, the group does not include NBK which is a market heavy weight in its own right). With Zain at 19%. 
  5. In Oman, 5 companies for 35%. One, Omantel, for 14%. 
  6. In Bahrain, 4 companies for a whopping 69% of the market. One, Batelco, for just short of 20%.
By contrast Exxon Mobil (the largest single stock) represents roughly 2.6% of the NYSE's US$11.7 trillion in July 2010 market value. HSBC just short of 7% of the LSE's US$2.7 trillion of value.

"So what?" you might ask.
  1. Modern portfolio theory ("MPT"): Where a handful of companies dominate the market, market risk may be swamped by specific risk. What sense does it make to use the tools of MPT, e.g., CAPM, betas, etc in this context? 
  2. Conflict of Interest: But there's more. Where the government has significant holdings in companies, even if this shareholding is less than a majority, it may exercise effective control. In such situations, companies may be managed with national strategic goals more important than maximizing shareholder wealth. 
  3. Liquidity: Government strategic holdings reduce free float. The consequence is reduced trading which limits price discovery, increased share volatility (small transaction "tickets" have a disproportionate effect on price) and limited liquidity (the ability to exit one's position).
The implications are pretty clear but I think often not really thought through by market participants. And so probably not fully reflected in prices.

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