Bankers eye options to boost liquidity

Tentatively improving investor sentiment has delivered a mild rally on most Gulf stock markets recently, but trading volumes remain woefully low.

The average daily turnover in the Gulf markets so far this year has been $980m, almost half that in the same period last year, and almost a third of the $2.55bn daily average in 2008, according to Zawya, a local data provider.

The primary victims have been brokerages, but many company executives also argue that the trading slump has hindered effective “price discovery” and their shares trade below their true worth.

DP World, Dubai’s ports operator, has signalled plans to list shares on the London Stock Exchange to boost its shares.

Some bankers argue that Gulf companies should also consider listing depositary receipts, or DRs, on international exchanges to counter low trading volumes and boost foreign institutional interest.

Depositary receipts are financial instruments that represent the economic value of a company’s underlying shares, or occasionally bonds, and are often used by local companies to list and trade on international exchanges, such as the LSE or the New York Stock Exchange.

“The [local] liquidity is really horrendous, and DRs could have to come back due to the low local listing liquidity,” says the head of capital markets at a leading investment bank.

Several Middle East companies already run DR programmes, such as Orascom Telecom, Orascom Construction and Commercial International Bank in Egypt, Solidere in Lebanon and Turkcell.

Last year three more companies started DR programmes: Lebanon’s Byblos Bank, Egypt’s GB Auto and Hikma Pharmaceutical in Jordan. Overall, the region saw $9.2bn of DRs trade last year, according to research by Bank of New York Mellon.

Gulf companies have proven more reluctant to list DRs, and Investcorp in Bahrain and Kingdom Holding in Saudi Arabia recently delisted DRs from the LSE and Nasdaq Dubai.

However, Peter Gotke, vice-president of depositary receipts at BNYM, points out that Global Investment House in Kuwait and BankMuscat in Oman run relatively successful programmes, and says that several companies in Kuwait and the United Arab Emirates are preparing potential DR sales next year.

“The Gulf was about to take off before the crisis, and it seems to be coming back now,” he says. “DRs can be an important tool in counteracting low liquidity in local markets.”

Aluminium Bahrain, or Alba, recently joined the small band of Gulf companies with DR programmes when it sold 10 per cent of itself to investors – in the form of 69m ordinary shares on the Bahrain stock exchange and 14.6m GDRs, each representing five ordinary shares.

More Gulf companies should consider following Alba, argues Hani Kablawi, chairman of BNYM’s Middle East operations. “The Gulf markets need more institutional and international investors, and issuing DRs can be a way of attracting them.”