A Year of Two Halves
High economic growth and soaring oil prices helped the capital market to soar during the first six months of 2008. the MSM was quick to shed its gains in the second half as worries about the global meltdown spread
 

By Oliver Cornock

For the Muscat Securities Market (MSM), 2008 was very much a year of two halves. In the first six months of the year, high economic growth and soaring oil prices helped drive impressive capital market growth. In the second half, however, renewed worries about the health of the global economy and a dramatic fall in oil saw many gains reversed as the MSM caught the cold affecting all the region’s bourses. By the end of the year, however, signs of recovery were emerging, thanks in part to assertive government action.

The first half of 2008 saw a continuation of the robust performance of the previous year. Ritesh Jesrani, head of research at Al Madina Financial & Investment Services told OBG that key growth drivers included, “a significant increase in investor participation – both local and foreign – improving company fundamentals, and a vibrant economy backed by high oil prices”.

While the emergence of the global credit crunch in the third quarter of 2007 had led to the cooling of stock exchanges in North America and Europe, the GCC member states had seemed relatively immune from the ill effects. Indeed, with oil prices surging (partly as a result of speculative pressure) and Gulf sovereign wealth funds (SWFs) acquiring stakes in several major Western financial institutions, the region was widely regarded as benefitting from the crunch.

While Oman did not participate in the move to snap up bargain US and European assets, OBG was told that investors were in some cases purchasing Omani shares as a hedge against declining Western investments. Furthermore, the new enthusiasm that larger Gulf countries developed for purchasing stocks abroad led to many of their citizens putting money into the MSM. By the end of 2007, foreigners owned 27.3 per cent of shares listed on the exchange. Meanwhile, the strong growth of the domestic economy had its own natural effect of boosting stocks.

The flip side
However, the second half saw the MSM hit by two interlinked factors; the worsening of the global economic outlook as the credit crunch spread, and a sharp drop in oil prices (from a high of nearly $150 per barrel in July to around $45 at the end of the year).According to Jesrani, the same foreign investors who had helped boost the exchange in 2007 and the first half of 2008 were often the first to get cold feet. “Overseas institutional investors, impacted in some way or the other by the US subprime crisis, were the first to react by withdrawing their holdings in several emerging and frontier equity markets,” he told OBG. “The MSM was no exception to this trend with a reported RO284.5mn ($739.7mn) in net selling by foreigners in just five months from June-October 2008,” he said. Many domestic investors, fearing that Oman’s economy would be hit by the drop in oil (which remains the Sultanate’s major export), also sold off.

“That combination of both foreign and local investors withdrawing their money from the MSM landed a double blow to the local equity markets,” Jesrani said. “This massive selling resulted in an erosion on the exchange of close to RO4.67bn ($12.1bn) from May 2008 till end October 2008.” Indeed, the market lost around 50 per cent of its value from its June 11 high.According to Hamid Hamirani, senior vice president of Vision Investment Services, investors have been drawn away from the stock market to bank deposits. According to Hamirani, the drying up of lending to Omani banks from foreign institutions “was partially offset by local banks offering attractive deposit rates to lure local investors.”

“The offer of fixed and certain income was too tempting for investors to resist resulting in a switch from uncertain equity returns to certain fixed deposit income,” he told OBG. While the logic behind this switch seemed strong, it appears that the stock sell-off was triggered as much by sentiment as by appraisal of future value – the perception that stock investments are somewhat volatile having been reinforced by recent events

“To a considerable degree, the panic sell-off was led by widespread confusion and future uncertainty, with investor sentiment dealing its heavy dose of reaction to the sliding equity market,” said Jesrani. “With the current crisis unfolding, the concept of ‘rationale’ investing on the MSM has taken a back seat as investors gave little or no regard to the resilient nature of economic fundamentals and the improving corporate performance of listed entities,” he added.

Government intervention
With the flight from the MSM gaining momentum – the exchange lost 26.9 per cent in October alone – the government saw fit to step in to bolster the market, launching a RO150mn fund on November 20 in partnership with private financial institutions. The fund is to invest in a range of stocks both to boost liquidity and bolster share values, before selling them once the market is deemed to have recovered.

At the time of writing, the medium-to-long term outlook seemed to be brightening, partly due to the new package, but also because of strong micro and macro fundamentals. Alone among Gulf bourses, which as a whole lost $127bn, the MSM gained in November, albeit by one per cent (the Dubai Financial Market (DFM) fell by nearly a third).

The MSM could perhaps be said to be fortunate to be relatively small, and therefore less subject to speculation than larger regional exchanges which have clocked larger losses, but it also has some key underlying strengths. Whereas some GCC capital markets are still criticised for lack of disclosure, Oman has led the field in championing transparency and regulatory oversight, and was the first Arab country to develop a corporate governance code. The MSM benefits from the oversight of the highly-regarded Capital Market Authority (CMA), which has imposed standards expected by international investors while not stifling growth. While other Gulf bourses may have to force through substantial reforms to aid their recovery and to restore investor confidence, the MSM already has a world-class infrastructure in place. Furthermore – in common with most other GCC members – the Sultanate has a fine macroeconomic base.

Driven by reforms
“Oman’s strong corporate governance discipline, investor education, ample reserves, diversification programme and prudent policy practices should in theory bode well and add to the fiscal and monetary policy support of the government,” Hamirani told OBG. What is more, with the US Federal Reserve axing interest rates to close to zero, and the Central Bank of Oman (CBO) set to follow with its own rate cut, bank deposits may start to look less attractive compared to the potential of recovery stocks.

This is not to say that there are not substantial challenges ahead. The long-term goal of boosting the MSM’s liquidity has been set back somewhat, as it seems likely that companies will postpone initial public offerings (IPOs) until they see a full-fledged recovery, while Western investors face straightened circumstances through 2009. Furthermore, the new capital market fund will have to be very carefully managed. Stocks will need to be assessed for long-term viability, and the future divestment planned to ensure that it does not result in a slide in share values. The MSM is still relatively small, and its development has been arrested by global factors over the past six months. But the Sultanate’s prudent policy making and support for the exchange should see it regain momentum over the medium term.

The author is Regional Editor, Oxford Business Group.

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