How robust economic growth and reforms are attracting investors to GCC stocks

Government incentives, foreign investor interest and diversification efforts are driving IPO activity

Traders work at the Dubai Financial Market. GCC IPOs have thrived despite global challenges and the UAE has played a substantial role in this market. Victor Besa / National

Proceeds from global initial public offerings surged by 46 per cent in the second quarter of 2023, with the Asia-Pacific region, led by mainland China, contributing about 68 per cent of the total.

However, the first quarter of the year faced difficulties, with the lowest quarterly IPO proceeds since 2019, raising $25.7 billion through 234 floats, compared with $58 billion raised by 286 IPOs in the corresponding period last year.

The main drivers for the GCC region’s IPO growth include government incentives, foreign investor interest and diversification efforts.

Challenges may include global economic uncertainties, geopolitical factors and fluctuations in oil prices.

GCC stock market performance

The UAE and Saudi Arabia lead the region and have undertaken ambitious diversification efforts to reduce oil dependence and stimulate growth in non-oil sectors.

These strategic initiatives have significantly affected stock market performance, making them more attractive to investors.

This was evident in the robust increase in IPO activity, with the GCC region standing out globally.

GCC IPOs have thrived despite global challenges and the UAE and Saudi Arabia have played a significant role in this market, collectively raising $7.35 billion from 35 IPOs.

The UAE accounted for 54.42 per cent of the GCC’s IPO value, while Saudi Arabia led in terms of IPO volume, with 26 offerings year to date.

The region anticipates a strong IPO pipeline fuelled by government incentives and foreign investor interest, with more than 15 companies already announcing listing plans before the end of this year.

Overall, GCC stock markets recorded an impressive performance, with the MSCI GCC Index surging by 13.85 per cent in the past three years.

Success factors

Regulatory environment: This upswing can be credited to critical factors, including robust gross domestic product growth that attracts investors and reflects the region’s economic strength.

The GCC’s resilience to global geopolitical events has drawn passive index investments and favourable index weights for its stock markets.

Contrary to common belief, oil and gas contribute to less than 40 per cent of GDP in most Gulf countries, making up 30 per cent of the UAE’s economy and 18 per cent of Bahrain’s GDP in 2022.

The GCC economies displayed remarkable resilience and growth, with a robust 7.5 per cent expansion in 2022.

Investors were also enticed by the region’s FinTech advancements, offering digital trading platforms and technological innovations for enhanced accessibility.

Additionally, regional stock exchanges are expanding their reach, exemplified by the recent introduction of a futures market by the Dubai Financial Market.

Attracting the Muslim investor: Saudi Arabia and the UAE have developed robust Islamic finance sectors, offering various Sharia-compliant products, including Mudarabah (profit-sharing), Murabaha (cost-plus financing), and Ijarah (leasing).

Both countries have thriving Islamic fund industries, offering equity, real estate, fixed income and sukuk funds adhering to Sharia principles.

As Sharia-compliant bonds, sukuk are actively issued in both countries, attracting investors seeking Islamic investment options.

The Islamic insurance model, takaful, is widely available in Saudi Arabia and the UAE, covering various insurance types.

Introducing sukuk as an Islamic alternative to conventional bonds has broadened investment options and attracted a global investor base.

Enhanced market liquidity: The UAE, a regional leader, improved market infrastructure, including trading platforms and settlement systems, enhancing market efficiency.

Abu Dhabi’s investment holding company ADQ launched the Q Market Makers programme to grow liquidity on the Abu Dhabi Securities Exchange, while Dubai established xCube to promote market maker activities on the DFM to attract more capital.

Market-making companies have significantly increased market liquidity by offering continuous buy and sell quotes.

The DFM’s average daily trading volume reached Dh347.25 million in the first half of 2023, surpassing the volume from June to December 2022, which was Dh279.81 million.

These initiatives have led to institutional investors contributing approximately 78 per cent of the total trading volume, encompassing both buying and selling activities, in both markets since the beginning of the year.

Prospects and initiatives: The GCC’s IPO surge continues, driven by state-backed entities, government incentives, and foreign investor interest.

Initiatives like Qatar’s market-maker programme, Qatar Stock Exchange’s expansion plans, and incentives from exchanges like Saudi Exchange, ADX, and DFM will support IPO growth.

Privatisation efforts are set to bring non-state-owned entities and family businesses to the listings landscape.

In summary, the Middle East and North Africa region’s IPO outlook remains positive.

International investor perspective

International investors are increasingly drawn to the GCC stock markets due to robust economic growth and government reforms.

The opening up of these markets to foreign investors amplifies this interest.

GCC stock markets have recorded a strong performance driven by favourable factors, such as optimistic investor sentiment, evolving market trends, innovations and growing international interest shaping the landscape.

Vijay Valecha is chief investment officer at Century Financial